August 27, 2003	Wednesday	Jumadi-us-Sani 28, 1424

ISLAMABAD, Aug 26: The Asian Development Bank (ADB) has expressed serious concern over the poor quality of public sector development spendings in Pakistan and has forecast a number of economic risks owing to slackening of fiscal adjustment effort and no pick up in investment and employment generation.

The ADB country representative in Pakistan M. Ali Shah and senior economist Naveed Hamid on Tuesday released Pakistan Economic Update, a review of the fiscal 2002-03 (July 2002-June 2003), and termed Pakistan’s performance during fiscal 2003 as “mix bag” of successes and failures.

They told reporters that spendings under public sector development programme and poverty reduction strategy were very low during the first three quarters of the fiscal but large scale releases in the fourth quarter to show higher utilization compromised the quality of delivery and resulted in leakages.

M. Ali Shah said the government made successes on macroeconomic fundamentals including in areas like fiscal deficit, current account and foreign exchange reserves but employment generation and investment failed to pick up as the industrial sector did not expand and rather relied on maximum utilization of the existing capacity.

He criticized the government for poor quality of public spendings and its outcome. Giving one example, he said, only 30 middle schools were operational out of 300 schools funded by the ADB during the last three years mostly in Sindh, Balochistan and NWFP. He said another 6,000 other existing facilities financed by the ADB were not working. Same was the case with the assistance of other donors, he said.

Development expenditure in the first three quarters of 2003 was 9.9 per cent lower than the same period of fiscal 2002. The decline was entirely in federal development expenditure, which was 30.5 per cent lower than last year despite a much higher allocation.

In each of the preceding four years, total development expenditure of the federal and provincial governments fell short of the budget allocations by wide margins, reflecting poor implementation capacity of the government.

The ADB said the increase in non-tax revenue was mainly due to receipts from the United States for logistic support for operations in Afghanistan and payment of dividend by the Pakistan Telecommunication Company Limited (PTCL).

Excluding receipts for logistic support from US that amounted to Rs39.6 billion in July-March 2003 and Rs8.1 billion in July-March 2002, non-tax receipts of the government witnessed a fall of 22.5 per cent primarily because receipts from the central bank were less than one third of the level of last year, as a result of the losses incurred on account of SBP’s sterilization operations.

The ADB said the budgetary deficit target of 4 per cent of GDP during 2004 would be difficult to achieve mainly because of the persistence of large scale losses by the public sector entities and resulting need for subsidies. Power sector is a cause of concern and the government should bring in professional management in the two utilities.

Expressing some specific concerns, the ADB said a slackening of fiscal adjustment effort is evidenced by a further decrease in the projected primary surplus. The reliance for the reduction in the fiscal deficit is largely on lower interest payments. However, even with lower interest payments, the overall fiscal deficit of four per cent of GDP for fiscal 2004 would be difficult to realize.

This is because current expenditure of both federal and provincial government is likely to increase due to 15 per cent hike in salaries which are not performance-based and are not fully reflected in the budget and higher than projected losses of the two power utilities.

This is also because the budget does not contain any measures for reducing the losses of the PSEs or because of “hardening” the budget constraint faced by them. Without a determined effort to improve their operational efficiency, recurrent losses will continue to be a major drain on the public exchequer and undermine the viability of the federal budget.

The ADB is also concerned about the institutional weaknesses in housing finance sector which are a major constraint on increasing demand for housing.

As a percentage of GDP, gross domestic investment increased from 14.7 per cent to 15.5 per cent, but the entire increase was due to an increase in inventories, reflecting accumulation of stocks of wheat and sugar. Gross fixed investment remained stagnant at 13.1 per cent of the GDP which is an all time low level and 3.5 per cent below the average of 1990s.

The report said the marginal improvement in fixed capital formation in the private sector was offset by an equal decline in public investment. The stagnation of investment despite historically low interest rates was partially because of excess capacity utilisation by the industry and the investors’ policy of wait-and-see attitude because of an environment of political uncertainty generated by confrontation over the legal framework order (LFO).

Gross national saving (GNS) increased from 17 per cent of the GDP in fiscal 2002 to 19.2 per cent in 2003, entirely due to a sharp increase in net factor income from abroad by overseas Pakistanis. Net factor income from abroad constituted almost one- fourth of GNS compared with only 5.3 per cent in the preceding year.

Gross domestic savings, however, declined to 14.7 per cent of the GDP compared with 16.1 per cent in 2002. Lower interest rates, increase in purchases of consumer durables financed through greater availability of consumer credit and a sharp increase in prices of real estate and corporate shares may have boosted consumption and lowered domestic savings.