KARACHI, Jan 28: Confronting a rising budget deficit, the federal government has asked the Punjab, Sindh and NWFP governments to squeeze out more than Rs40 billion from their development budgets of the current fiscal year.

Sindh is being asked to take out Rs10 billion, Punjab Rs25 billion and NWFP Rs5 billion plus from their respective development programmes of 2007-08.

Sindh has drawn up a development programme of Rs50 billion, Punjab Rs150 billion and NWFP more than Rs20 billion from their own resources stipulated by the National Finance Commission in the federal divisible pool.

Balochistan entirely depends on federal funds for its Rs10 billion development outlay and hence there was no need to seek approval of the province for a cut.

“All the three provinces have opposed this cut on development programme,” a reliable source in the government said.

According to this source, the first indication of a development cut was given by caretaker finance minister in December last during his visit to Karachi when he proposed a cut of almost 50 per cent. Late last week, the federal government called a meeting of senior officials of the provincial governments at Islamabad where the proposal to apply a cut on development was formally mooted.

The federal government’s case is that it was bearing a burden of Rs14 billion a month on account of absorbing the international oil price-hike.

The consumers have, so far, been spared of the international oil price-hike. The oil distribution companies have partially been compensated for their commission losses by providing Rs40 billion bank bonds. There are indications of government pushing up prices of oil products from Feb 1 which may cut down average of Rs14 billion losses being suffered every month.

Adding to these losses is a wide price difference on account of imported wheat and local prices for consumers.

The budget deficit in the current fiscal year is feared to go beyond five per cent as against four per cent stipulated in the relevant law.

Sources in the government say that a cut on development programmes amounts to a revision of the budget, and for this an elected government after February elections is more competent to take any decision. The caretaker government will prefer to leave this decision to the next elected government.

Rising budget deficit has forced the government to resort to borrowing which has far exceeded the projection set at the beginning of the current fiscal year.

The revenue collection target at Rs1.025 trillion has also been scaled down to below one trillion rupees in 2007-08 because of a drop in collection of taxes and duties.

Pakistan’s economy is groaning under impact of a twin deficit — budget and current account — which is pushing up inflation in domestic market and bringing strain on exchange value of Pakistan rupee.

The growing uncertainty has put a halt on direct foreign investment. The State Bank of Pakistan is coming out with monetary policy next Thursday. For the last 18 months, the State Bank pursued a tight monetary policy, but it failed to control inflation. However, the industry and exports have been badly hurt by the rising interest rates.