The government has limited the borrowing by provinces equivalent to six weeks of provincial wages and salaries, totalling Rs 47 billion, to strengthen financial controls on borrowing. The government in the letter of Intent (LoI) submitted to IMF under standby arrangement facility said that agreements on the limits of provincial borrowing have been reached between the State Bank of Pakistan (SBP) and the provinces and which are being enforced rigorously.
"Agreements have also been reached between the SBP and Punjab and Balochistan to convert their outstanding overdrafts of Rs 50.9 billion and Rs 8.8 billion, respectively, into four-year loans with interest equal to the 6-month T-bill rate, to be repaid in monthly instalments," the LoI said.
The government had provided a guarantee to the SBP for these provincial loans on November 23, 2009. For the other two provinces, no long-term loans were needed. The LoI adds that there are regular monthly meetings between the Federal Ministry of Finance and Provincial Finance Departments to monitor the provinces'' financial positions and ensure that they are consistent with the fiscal targets.
According to World Bank Report titled ''Economic Update September 2009'' on Pakistan, large overruns in provincial development expenditures compromised federal government. Federal development spending was below the target, but provincial development expenditure exceeded the target.
Most of the additional expenditure at the provincial level was financed by borrowing from the banking system, mainly from SBP, with adverse implications on money supply and inflation. "As government borrowing from banks and non-banks has increased, credit to private sector has been crowded out and fallen dramatically from Rs 408 billion in 2007-08 to Rs 19 billion in 2008-09," the report says.