Provinces allowed to borrow domestically up to 0.5 percent of GDP

Federal government has allowed provinces to borrow domestically up to 0.5 percent of GDP or Rs 153 billion after excluding domestic loans of Rs 40.4 billion owed to the federal government. According to federal budget documents exclusively made available to Business Recorder while considering their proposals regarding "Public Debt Management & Supervision Policy", the Council of Common Interests (CCI) in its meeting held on May 29, 2014 directed Finance Division to work out raising provincial debt ceilings within available space soon after the budget 2014-15 exercise is over.
According to documents, after the passage of the 18th Constitutional Amendment provinces have been empowered under Article 167 of the Constitution for raising domestic/foreign loans, subject to clearance from the Federal Government and approval of the borrowing limit from the National Economic Council (NEC). While setting the borrowing limits all stakeholders were consulted and relevant provisions of Constitution, Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 and other facts were taken into account. The NEC was updated that during FY 2014-15, the debt to GOP ratio will be 2.9 percent above the debt to GOP ratio (60 percent) which is largely due to a downward revision of GDP and net positive inflows from the IMF that added to the debt burden.
Minister for Finance stated that Pakistan was currently operating under an IMF Program, with the central theme to significantly reduce the consolidated fiscal deficit of the federal and provincial governments. In view of the major shift in transfers from the overall divisible pool in favour of the provinces, the federal government can achieve the fiscal deficit reduction target only if the provinces generate surpluses in their budgets. This process has worked well which was made possible by a CCI decision of July 31, 2013 on a summary from the Finance Division whereby the federal government has incentivized provinces for this purpose by agreeing to pay a return on these surpluses at the average rate of return for last three months. So far, the federal government has paid Rs 12.06 billion to provinces on account of incentives on surpluses in provincial balances and a further amount of Rs 3.14 billion is to be paid in the coming days.
Finance Ministry submitted the following proposals before the NEC for consideration and approval: (i) the federal government will continue to assist provinces to receive support from development partners such as the World Bank, Asian Development Bank and bilateral sources. Since these loans are contracted by the federal government, they are counted in the federal indebtedness and no additional burden on overall debt/GDP is entailed; (ii) despite limitations of available fiscal space, a symbolic start of allowing provincial borrowing should be started. Accordingly, Finance Ministry proposed that provinces may be allowed a domestic borrowing limit of 0.5 percent of GDP (or 153 billion) after excluding domestic loan of Rs 40.4 billion owed to the federal government which implies a net limit of Rs 112.6 billion. The sources said the limit will be distributed among the provinces as per their relative share in the divisible pool.
According to the NFC, the share of Punjab is 51.55 percent, Sindh's 24.55 percent, KPK's 14.62 percent and Balochistan's 9.09 percent. Gross borrowing limit of Punjab is Rs 79.16 billion, Sindh Rs 37.56 billion, KPK Rs 22.37 billion and Balochistan Rs 13.91 billion, totalling Rs 153 billion. The domestic provincial debt of Punjab is Rs 17.41 billion, Sindh's Rs 17.51 billion, KPK's Rs 5.48 billion and Balochistan's zero. The net available limit for Punjab is Rs 61.75 billion, Sindh Rs 20.05 billion, KPK Rs 16.88 billion and Balochistan Rs 13.91 billion. The total net available limit of provinces is Rs 112.59 billion.