ISLAMABAD, May 22: The federal government is reported to have turned down the provinces’ request to be allowed to borrow from the market to pay back Rs137 billion development loans they owe to the federation. The loans carry about 17-18 per cent interest. The commercial banks are ready to lend at 4-5 per cent mark-up to the provinces. Under the constitution, the provinces cannot borrow directly from the banking sector without permission from the centre.
Sources in the finance ministry told Dawn that all the four provincial governments had taken up the issue - both individually and jointly and also as part of discussions on National Finance Commission award - with the federal government in recent days.
The provincial chief ministers and finance ministers had last month raised the matter individually, jointly and as part of discussions on the NFC award, with the president and the prime minister. “The prime minister refused to oblige,” a provincial finance minister told this correspondent.
The four provinces had asked the federal government to give them borrowing powers to refinance CDLs through cheap banking sector loans and make savings in interest payments. They argue that since the centre has achieved enough fiscal space through rescheduling of its foreign debt, the same principle be applied to the CDLs to provide some relief to the federating units as well.
“The repayment should take place according to the terms these CDLs were extended to the provinces...refinancing is not possible,” said Dr Salman Shah, Adviser to the Prime Minister on Finance and Revenue when contacted by Dawn.
He, however, said the provinces could be given limited restructuring of these loans on a case-to-case basis and gradually according to their specific financial difficulties. In this regard, Balochistan, the NWFP and Punjab were given some relief in the past, he said. Mr Shah said the government usually included certain revenue projections in the federal budget and if refinancing of CDLs was allowed, it would disturb these targets. “If revenues in this head are reduced, then its replacement would be required which is not an easy job.”
The government has already lost Rs50 billion in petroleum development levy (PDL) this year, he said. The federal government has projected about Rs31 billion receipts during the current year on account of principal and interest payments by the provinces on CDL. The centre not only disallowed the refinancing of CDLs but also recently refused to give more than Rs7 billion to three provinces (including Sindh and the NWFP) who wanted to use the money repay to the federal government, a source at the finance ministry said.
The provinces say that while the federal government has been earning more than Rs30 billion per year as repayment of principal and mark-up, the repayment is turning them (provinces) into paupers.
“We are not asking the centre to write off CDLs. The only thing we want is that interest rates should have some relevance with the ground conditions. After all, the provinces are part of the federation,” said a provincial finance minister.
The CDLs extended by the federal government have become a perpetual liability for the provinces and they have to bear heavy cost for that. They want to get rid of this liability at any cost, an official said.
They argue as to why the provinces have been made to continue repaying loans to the federal government at 17-18 per cent interest when the commercial banks were offering loans at almost negligible 3-4 per cent mark-up and they had enough liquidity to lend. The sources said the provinces were legally and constitutionally required formal permission from the federal government to raise loans.
The provinces had demanded that an in-built mechanism should be provided in the new NFC award so that the provinces could raise cheap funds from the market and repay the costly cash development loans, lightening their burden.
The CDL has been a problem for the provinces for more than a decade now. A couple of years ago the repayment situation became so difficult for Sindh and Balochistan that the World Bank had to intervene and provide soft-term loans to both provinces on federal government guarantee.
The public sector corporations, particularly Wapda, has also been calling upon the federal government to allow it to raise funds from the market for repayment of CDL which amounts to around Rs20 billion every year. An estimate suggests this could reduce Wapda’s repayment burden to Rs9 billion per year.
The federal government has been converting billions of Wapda loans into equity but has not allowed the utility to repay CDL through fresh commercial loans. It had been allowed this facility only once two years ago.
