Khyber Pakhtunkhwa government has made a saving of Rs 6.065 billion per annum as result of premature retirement of federal loans. According to White Paper for FY 2017-18, the provincial government after realizing the heavy debt servicing liability on the provincial budget decided the premature retirement of expensive loans of federal government under its debt management strategy.
The government of Khyber Pakhtunkhwa started the process of the repayment of expensive federal government's loans from the financial year 2002-03 and up to financial year 2015-16 a sum of Rs 27.018 billion has been repaid prematurely to federal government.
The White Paper said that there is nothing inherently wrong with debt, if loans are invested in the project where rate of return is higher than the cost of servicing the loans then there shouldn't be any problem. To finance the development plans, the province relies on different types of borrowings and loans from federal government are one of them.
In the past, federal government has provided Cash Development Loans (in Pak rupees) to the provincial government with long term maturing. These loans were repayable on five years grace period, during which any interest is payable, repayment in 20 years, markup rate determined by the federal government on yearly basis and recovery on monthly basis by the Finance Division, at source, from federal tax assignment. However, there is no outstanding debt liability against the provincial government on account of federal loans (Cash Development Loans) as on 1st July, 2017 due to early premature retirement of loans.
Under the 18th Constitutional Amendment, the provinces have been given liberty to issue Sovereign Guarantee in the Article 167 (4) of the constitution, which provides that 'Any province may raise domestic or international loans or give guarantees on the security of the Provincial Consolidated Fund within such limit and subject to such conditions as may be specified by the National Economic Council (NEC).
In pursuance of Article 167 (4) of the Constitution, in June 2015, the National Economic Council's decision to fix provincial borrowing limits was communicated to the provinces. The borrowing limit for Government of Khyber Pakhtunkhwa was fixed at Rs 16.88 billion, however, NEC maintained that existing channel of external financing through Economic Affairs Division (EAD) would continue, to enable provinces to access external financing as such foreign exchange loans are still handled by the federal government.
These loans are used for the financing of specified development projects under an agreement between the respective governments. The re-lending terms and conditions of the loans to the provincial government are the same as agreed by federal government with the loan giving agencies. Most of the loans are embedded fixed interest rates; only 2 loans are on LIBOR terms (variable interest rate). Foreign debt, in terms of currency composition, is heavily denominated in US Dollars which accounts for more than two-third of foreign debt stock.
The detail of outstanding liability on account of these loans against the government of Khyber Pakhtunkhwa is Rs 90.810 billion as on 1st July, 2017. Moreover, the confirmation of outstanding balances of a number of foreign loans is under verification between provincial and federal government as the disbursements made so far against these loans up to 30th June, 2017 is Rs 24.721 billion against their allocated share. The total debt liability on account of foreign debt is Rs 115.531 billion.
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