BALOCHISTAN'S RS17.4 BN OVERDRAFT, A LIABILITY OF THE FEDERAL GOVERNMENT

SYED FAZL-E-HAIDER
July 20 - 26, 2009

Federal government has taken the liability to pay the province's Rs.17.4 billion overdraft with the central bank. The province has so far been in the vicious circle of loans emanating both from the central bank as overdraft and from the federal government as cash development loan (CDL). Provincial government has been trying to seek a complete write-off of its overdraft with the State Bank of Pakistan (SBP) or its conversion into a soft loan.

Last year, the central bank had offered relief package to the Balochistan government by putting its overdraft with the SBP into a blocked account. The package aimed at providing a breathing space to provincial government by putting its overdraft with the SBP into a blocked account, which was to be brought to zero within a period of six years by deductions of suitable monthly installments. In order to further facilitate the government, the existing limit of ways and means advance was enhanced to Rs2 billion from Rs1.7 billion. The financial position of the province began to deteriorate since November 2003. In 2004, the SBP had sanctioned various concessions for Balochistan government, but its measures to reduce its outstanding liabilities fell short of expectations. In April 2008, the provincial chief minister was asked to provide the revised estimates of financial projections, additional amount expected from the federal government and additional cash inflows from other sources such as royalty etc. Based on the financial projections presented by the Balochistan government and its commitment to reduce the overdraft with the SBP, the central bank had agreed to offer a one-time financial relief package as an exception to the Balochistan government.

The province has been returning loans at high rate of interest. It had even crossed the central bank's borrowing limit by Rs16 billion. The CDLs carry about 17-18 per cent interest rates. Balochistan may be allowed to borrow to repay its CDLs by cheap banking sector loans. Commercial banks are ready to lend money to the provinces at mark-up rates between six and eight per cent. 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.

On the eve of Balochistan budget for the fiscal year 2007-08, the province had paid almost 75 per cent of federal government's highest interest loan to the tune of Rs 75 billion by obtaining soft loan from Asian Development Bank (ADB). The province obtained soft loan on 3.5 per cent rate from ADB and had paid Rs 42 billion. Federal government had given a concession to the province by bearing the currency fluctuation of ADB loan. Former provincial government had ensured repayment of the hard cash development loans by obtaining funds under the Balochistan Resources Management Programme (BRMP) and Balochistan Devalued Social Services Programme. The CDL was cleared after receiving second installment from the BRMP. The province saved around Rs250 million on account of interest it was paying on the CDL every month.

Loan, be it soft or hard, is after all loan. It is not the permanent solution to the perennial financial problem of the province. Last year, federal government declared mega seaport at Gwadar as functional. But, what the province has gained in terms of its financial health, which is worst-affected with the vicious cycle of debt and interest payments. During first half 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. The province during the critical period was forced to spend Rs3 billion per year in the shape of interest payments.

The financial discipline of the provincial government should aim at increasing the resources and benefiting from the limited revenue of the province. The Baloch nationalists have strongly been demanding the ownership and effective administrative control over natural resources of the province. A need is also felt for restructuring of those federal agencies that control production, distribution, and revenue of natural resources in provinces.

The province has been in throes of financial crisis since1970 when it got the status of fourth province of Pakistan. After revival of provincial status, it was faced with certain problems of key importance such as lack of physical and institutional infrastructure for governance. In the second phase of its development that started in 1977, the province witnessed long-term planning pattern like five-year plan. This phase culminated in October 1999 when Pakistan army took over ousting the Nawaz Sharif government in Islamabad. The province has been managing to run its affairs on loans, subventions, hopes, and promises. It is bearing the high costs of maintaining law and order, as it is facing an insurgency.

Balochistan actually presents a classical example of a province on the country's political periphery that is heavily dependent on the centre to meet its financial needs. Ironically, the centre recovers the outstanding dues against the province by all means and the province's dues outstanding against the centre and other provinces are not paid. Billions of rupees in gas arrears are outstanding against the federal government. The gas surcharge dues include Rs128 billion owed by the federal government and Rs23 billion by the Sindh government. Moreover, over Rs24 billion irrigation dues are outstanding against the Sindh government. While the province has been facing serious financial problems, it could not get its outstanding dues against the centre and the Sindh.

Merely loans, subventions, and promises can not get the province out of its perennial financial problems. A sustainable strategy needs to be implemented to take over the province's financial crisis and to put it on the road to self-reliance. As a first step in this direction, all the Balochistan's dues, which are outstanding against the centre and other provinces, should immediately be cleared. It is a good step by the federal government that it has picked up the liability to pay the province's Rs.17.4 billion overdraft with the central bank. Balochistan's finances are expected to witness improvement in the current fiscal year, according to the analysts.