Feb 25 - Mar 02, 2008

Balochistan has been in the vicious circle of debt and interest payments. The province continuously experienced financial crisis on account of its debt servicing liabilities. The resource constraints had forced the former provincial government to sign an agreement with the SBP to convert its more than Rs10 billion overdrafts into a block loan. It also borrowed from Asian Development Bank to repay federal loans. In the current fiscal year (on the eve of provincial budget-2007-08), the province paid almost 75 percent of federal government's highest interest loan by obtaining soft loan from Asian Development Bank (ADP).

Balochistan has been obtaining loan under the head of cash development loan or cash deposit loan (CDL) and it was paying 22 percent interest annually on CDL. The province had obtained Rs19 billion in loans in the 1990s and had paid Rs39 billion as interest by the year 2006 when the provincial government's loans with State Bank stood at Rs15 billion after interest payment of over Rs262.7 million. During first six months of the fiscal year 2006-07, Balochistan's interest repayments had exceeded Rs250 million per month taking its overdraft to the highest ever Rs16 billion. The provincial government was forced to freeze its current expenditure and development program almost at the last year level. The province during this critical period was forced to spend Rs3 billion per year in the shape of interest payments.

Being in high-interest debt-trap, Balochistan financial health continuously deteriorated. The provincial government was forced to manage its affairs on loans and subventions from the centre. For the past three years, the debt burden of the province had been on rise for shortage of funds which increased its debt servicing costs. The previous provincial budgets were the deficit budgets. Balochistan budget of Rs34.835 billion for 2003-04 recorded a deficit of Rs2.47 billion that was seven per cent of the total outlay. While the provincial budget 2004-05 had a deficit of Rs9.5 billion, the budget 2005-06 posted a deficit of Rs13.24 billion. Similarly, the Rs 63.27 provincial budget for the current fiscal recorded a deficit of over Rs.10 billion.


Balochistan had obtained overdraft of Rs16 billion from the State Bank of Pakistan up to June 30, 2006 and during the first seven months of the last financial year no further overdraft was taken. Balochistan government obtained soft loan on 3.7 per cent from the ADP to get rid of hard loans pending against it. After paying CDL, the province saved Rs1.5 billion annually that it was paying as interest on CDL. The provincial government planned to repay Rs9 billion CDL to Islamabad after receiving funds under the Balochistan Devolved Social Services Programme (BDSSP) and second installment of Balochistan Resources Management Programme (BRMP) from the Asian Development Bank.

The province had received $135 million (Rs 8.1 billion) from the ADB under the BDSSP, out of which $110 million (Rs 6.5 billion) have been paid to the federal government to retire expensive cash development loans. Another amount of $45 million (Rs 2.7 billion) was received under the BRMP from the ADB, out of which Rs 2.5 billion has been paid to the federal government against CDL, making a total retirement of about Rs 9 billion. The cash development loan will be cleared after receiving second installment under the BRMP.

Former Balochistan government of Chief Minister Jam Muhammad Yousaf claimed that its loan strategy had changed the Rs9.3 billion overdraft into soft-term loan. Federal government had also given a concession to the province by bearing the currency fluctuation of ADP loan. The ADB had projected Balochistan's overdraft touching Rs 20 billion during the last fiscal year but the provincial government was able to contain it in the vicinity of Rs 16 billion through prudent fiscal policies, better management and controlling expenditure. Officials had claimed that Balochistan was the first province to pay off the CDL taken at rate of over 18 per cent. During the last two years, Rs10 billion loans were paid and presently the province owes only Rs3.5 billion loan. The overdraft of the State Bank on July 1, 2004 was Rs10.3 billion that had increased to Rs17.26 billion in July 2006.

The cash deposit loans carry about 17-18 per cent interest rates. Commercial banks are ready to lend money to the provinces at mark-up rates between six and eight per cent.

Two years back, Balochistan had floated a proposal for acquisition of loans from the open market at lower interest rates at the meeting of the National Finance Commission. The federal government had however rejected the idea. The centre must put in place a mechanism to reduce Balochistan's loan liability or allow it to borrow to repay cash deposit loans (CDLs) by cheap banking sector loans. Under the Constitution, the provinces cannot borrow directly from the banking sector without the center's permission. The Centre has acquired fiscal space by rescheduling of its foreign debts and the same principle should be applied to the cash development loans to provide relief to the poorest province.


Balochistan is the country's poorest and least developed province. It has a narrow tax base and it generates only a revenue of Rs2 billion from its own resources. It already presents the worse case scenario with respect to the issue of regional disparity. Over 50 percent population is subsisting below poverty line in the province. The entire urban population in Balochistan resides in high deprivation districts. According to one estimate, 89 percent of population in rural Balochistan and 49 percent in rural Sindh reside in high deprivation areas.

The centre should consider writing off the Balochistan loans, as the province has been a calamity hit area for the past one decade due to long spell of drought. It is bearing the high costs of maintaining law and order owing to the military operation, which is underway in the province for the last two years. Any initiative by the centre to write off debts may help the province tread on the path of self-reliance, as it has managed to increase its small revenue base by more than 100 per cent in the last three years to Rs2.8 billion from Rs1.3 billion.