Country’s budget dangerously dependent on foreign money

It was learnt on Wednesday that up to a quarter of proposed spending budgeted under the next fiscal year’s federal development programme depended on Pakistan’s relations with international creditors. Meanwhile, uncertainty continues to linger over the Pakistan Muslim League-Nawaz (PML-N)’s policy towards the International Monetary Fund (IMF).

Finance Ministry sources said that budget makers estimated receipts worth Rs112 billion as loans for projects in the Public Sector Development Programme (PSDP) 2013-14. This foreign loan component formed almost 25% of the total proposed development budget of Rs 450 billion for the next fiscal year.

The National Economic Council, which would be headed by the new prime minister, would accord a final approval to next year’s PSDP before its presentation to the National Assembly.

Foreign contributions are key to the PSDP’s overall size as loaned money was usually used to procure machinery and equipment for different projects. However, uncertainty regarding the timely disbursement of foreign funding was perpetual due to factors such as the timely execution of projects and the country’s relations with international creditors.

Sartaj Aziz, tipped as the next adviser to the prime minister on the economy and foreign affairs, recently said that his government would not negotiate for a new programme with the IMF for at least the next three to four months.

The IMF usually did not provide funds for project assistance and released money only for balance of payments crises. However, the other creditors who do – like the World Bank and the Asian Development Bank (ADB) – have always looked to the IMF before extending any assistance to Pakistan.

Due to Islamabad’s strained relations with the IMF, the World Bank and the ADB have suspended budgetary support to Pakistan. The latter two were also in the process of canceling various project loans, primarily because of Pakistan’s inability to complete projects punctually and its bureaucratic mismanagement.

Aziz’s statement heightened uncertainty as economic managers were planning their budgetary projections for the next fiscal year, a Planning Commission official said.

While foreign loans for development projects were important, there was always risk in their disbursement by donors, said former State Bank of Pakistan Governor Dr Ishrat Husain. He added that slow progress on projects caused slow disbursements from international lenders.

Dr Husain is also critical of the PSDP structure: he maintains that the fragmentation of PSDP allocations into various categories, like the Peoples Works Programme (which is spent at the discretion of the prime minister and parliamentarians), has rendered the PSDP ineffective and leaving little impact on economic growth.

Planning Commission spokesperson Asif Sheikh said a final decision will be taken regarding the share of the foreign loan component in the total size of the PSDP after due diligence. He said the Planning Commission, having learnt from past mistakes, would take only those foreign loans into account which have already been affirmed by lenders.

Out of a total of Rs 360 billion size of the PSDP for the current fiscal year, the foreign loans component was Rs 100 billion. Approximately Rs 84 billion had been received by early May, Sheikh said.

Pakistan’s increasing reliance on foreign loans exposed it to exploitation by lenders, sources warned. For instance, China’s Exim Bank withheld $448 million despite committing that sum to the 969 megawatt Neelum-Jhelum Hydropower Project, which greatly affected work on its development. The Exim Bank forced Pakistan’s hand, asking the country to take another loan for the controversial Safe City Project, designed to protect major cities from terrorist attacks by installing scanners at key areas. The Supreme Court of Pakistan had earlier struck down the project after finding serious flaws in its contract.

After the Exim Bank’s refusal to release funds otherwise, the government was forced to negotiate an expensive $500 million loan from the Standard Chartered Bank to continue work on the Neelum-Jhelum project.