Loan disbursements to tackle fiscal deficit
According to Finance Minister Ishaq Dar “if this issue is not taken seriously, fiscal deficit will end up at nine per cent of the GDP against the original target of four per cent.” He told a recent news conference that there was Rs522 billion over-run expenditure which the new government needed to arrange by June 30 to manage a six per cent fiscal deficit.
The Rs138 billion subsidies on petroleum products, Rs70 billion payable to Wapda and Rs45 billion spent on import of wheat were outside the budgetary provisions.
The Asian Development Bank (ADB) plans to disburse $600 million by June 30 this year, out of $1.9 billion assistance finalised for the calendar year 2008. On April 18, Prime Minister Yousaf Raza Gilani held a meeting with ADB’s Country Director for Pakistan Mr Peter L. Fedon. The finance minister was also present. The meeting took place in the backdrop of World Bank/IMF spring meetings that ended in Washington recently.
The ADB Country Director confirmed that he had a meeting with the prime minister in which he agreed to help contain the fiscal deficit by ‘quick disbursements’ of loans till June 30. He did not specify the amount but said it could be “several million dollars.”
“We have been asked for this support and we have decided to oblige the new government”, Mr Fedon added.
The modalities are currently being finalised for disbursing the committed loans on emergency basis. It would not be special assistance but a usual annual assistance which would be disbursed in the shape of ‘quick tranches’ to help overcome the government’s budgetary problems.
The ADB agreed to provide $1.9 billion each in 2007 and 2008, but for 2009, this lending level is expected to go up to little over $2 billion.
Pakistan has become the biggest borrower in the region while India and China acquire $2 billion and $1.5 billion loan respectively.
Mr Fedon said Pakistan’s borrowings have increased from $800 million to about $2 billion in the last three years on improved implementation process. There are now less complaints about financial irregularities and mismanagement in the ADB-funded development projects. The implementation procedure had improved due to holding of monthly meeting with the officials of the Economic Affairs Division. Those development projects which are not performing well will not be offered funds and this is how certain improved mechanism can be ensured.
He cited the example of Karachi Mega City Project which could not be undertaken so far as certain technical issues still remained to be sorted out.
“The bank had approved $800 million for this project and unless the provincial government makes sure that everything is O.K and fine in terms of its implementation, no funds will be disbursed”, he said.
The ADB, he said, provides grants for hiring experts who prepare feasibility studies of the development projects to be supported by the bank. “This money is provided free of cost and the objective is to thoroughly examine everything including the feasibility study so that the project does not become a headache”.
Similarly, till such time there will be full ownership for Karachi water scheme programme, no funding will be made available.
”This is a complex undertaking and since Karachi is very messy, we have to be very careful about the projects being supported by us”, he added.
ADB has adopted the policy of no extension for any project, made possible because of strict monitoring. But in certain exceptional cases, extension is allowed.
Mr Fedon believed that over the years, Pakistan had improved its financial discipline which was helping it to seek hassle-free borrowing from bilateral and multilateral donors. “We have a pretty elaborate procedure to ensure transparency”, he said adding that each project contract was evaluated three to four times before ADB gave No Objection Certificate (NOC).
“We have no flexibility in this regard”, he said adding that Pakistan was doing relatively well as compared to Asia and Pacific countries in terms of transparency. The ADB had become the biggest development partners of Pakistan.
Asked whether poverty had reduced, he said the menace was increasing in nominal terms but when you look at the absolute numbers, population has grown and there had been 4-5 per cent poverty reduction. This was a serious challenge as Pakistan needed to reduce poverty by 10 per cent.
However, he said that as there were no poverty related figures available after 2004-05, it was difficult to say anything about the issue authoritatively. The government should have compiled the poverty related data beyond 2004-05.
The ADB has decided to help the four provinces in improving their budgetary procedures and systems. Initially Punjab was being provided the required expertise support.
“Next month I will be meeting Sindh Chief Minister to discuss bringing improvements in the budgetary procedures of the province”, Mr Fedon said.
To help resolve the energy problems and the power crisis, ADB had offered $2 billion for a three year programme (2006-08). Last year, distribution companies were assisted both financially and technically and in 2008, transmission companies were being provided $500 million.
The solution lies in the setting up of more thermal power plants to generate adequate electricity. The daily shortage of 3000MW of electricity was a serious issue and needed all the attention of the government as well as the private sector, he said.
He called for settling tariff issues to facilitate the establishment of new power plants. “It takes about two to two and half years to set up a thermal power plant, while it takes a long time to establish hydro power station to generate electricity”, he said advising the government to urgently work out the related issues.
He said donors especially ADB was not against hydro power projects including Kalabagh and Bhasha dams. “You have plenty of water and you need dams and we can provide all possible financial assistance for this purpose”.
Low agriculture production seems to be a huge problem in terms of affordability and long-term sustainability. The agriculture potential should be explored and tax on agriculture income should be levied by the coalition government”, he said.
Similarly, he said, services sector should also be taxed to receive adequate revenues which would also eventually address the problems of increased fiscal deficit. The bank had given recommendations to the government to levy tax on agriculture income and services sector. He said revenues and exports should be enhanced to avoid witnessing the fiscal deficit at irreparable level. “Also you need to increase your foreign direct investment (FDI) to finance this deficit”.
Asked whether ADB’s $350 million access to justice programme loan had made any difference to offer cheap and speedy justice to the people, Mr Fedon said: “Some objectives have been achieved and some have not and this relates to devolution programme”.