May 22, 2006	Monday	Rabi-us-Sani 23, 1427

THE North West Frontier Province (NWFP), like the three other federating units is looking forward to receiving a substantial increase in its share under the new National Finance Commission Award to be effective from the financial year 2006-07.

The increased federal transfers, if used prudently, would improve fiscal space and enable NWFP to come out-of-the-box thinking to at least start moving towards accelerated industrial development that would create more jobs.

The centre has decided to increase the federating units’ share from the Federal Divisible Pool (FDP) to 47 per cent for next fiscal under an interim NFC award from 37.5 per cent under the last award.

In the next five years, the provinces’ share would gradually be raised to 50 per cent. With 13.82 per cent of the share in the FDP on the basis of its population, the NWFP would be comfortable with its finances.

According to conservative estimates, the province’s share in the FDP is expected to be between Rs8-11 billion inclusive of subvention money, the province would continue to get to off- set its state of under-development.

The expected increase in revenue receipts would bring some relief, as the cash-strapped provincial government, is left with lttile money for development after meeting obligations under heads of pay and pension, debt repayment, utilities etc

Traditionally, the province has been heavily relying on internal and external borrowings to finance development activities. It has created indebtedness. NWFP’s total debt liabilities have swelled to well over Rs60 billion and are expected to touch Rs100 billion mark by the end of the 2009-10, according to official estimates.

With such a high debt portfolio, the government would allocate about 20 per cent of its revenue receipts to clear part of its foreign and local debt during 2006-07.

Then there is a million dollar question. What will the clergy-led NWFP government do with about Rs10 billion additional funds under the NFC award?

Would it continue diverting major chunk of the provincial resources to the social sectors with education and health getting the lion’s share in line with multilateral donor agencies requirements ? Or would the government continue to put in place an over-sized and over-stretched annual development plan which may not materialize ( as in its last four years) because of the project executing agencies’ incapacity to deliver?

Or would it use the additional funds to practically start its journey towards achieving ‘over ambitious’ targets of poverty reduction and improve gross domestic growth (GDP) rate from estimated 5.1 per cent in 2002-03 to an all time high 7.5 per cent in 2009-10 fiscal year- including the increasing number of jobs in the private sector from 4.7 million in 2005 to 5.9 million in 2010 to cut the rate of unemployment from 13 per cent to 9.6 per cent.

Keeping in view the performance during the last three and a half years and the heavy reliance on borrowings to finance the provincial annual development programme, one can not pin high hopes on effective use of the additional funds.

While the provincial government’s wizards are busy formulating future goals, setting estimates of higher allocations for each of the sectors this time round, there are clear indications about the provincial government’s non-developmental expenditure also going up substantially.

The increase in revenue receipts because of improvement in transfers from FDP is likely to be partly off set by a likely increase in pay and pension of the public sector’s serving and retired employees – fifth pay raise during the last six years.

President Pervez Musharraf has recently announced his plans to ‘considerably’ increase public sector employees’ salaries under the next financial year’s budget as part of his strategy to improve their purchasing power in the face rising prices of essential items.

The announcement by the President has already rung alarm bells among the provincial budget makers who apprehend that, like previous years, this time too, the federating units would bear the cost of increase in salaries from their own kitty.

In the case of the Frontier province, a salary raise from 18 to 24 per cent again (as was the case in the 2005-06 fiscal year), mean an additional burden of about Rs3 billion. The province has already seen its annual wage bill go up by over Rs5 billion during the course of the last few years because of the frequent pay increases.

That decision has also undermined NWFP’s ability to adhere to the World Bank’s condition, under the Structural Adjustment Credit – to keep wage bill at around 4-4.1 per cent of the provincial GDP (or 45-47 per cent of total annual expenditure).

The provincial government has a total of 182,000 employees and about 100,000 retired servicemen whose pay and pension, respectively, comes to a whooping Rs26 billion – about 50 per cent of its total annual current expenditure.

The province saw its salary bill go up by over Rs2 billion during the 2005-06 financial year as a result of the federal government’s decision to increase the government employees’ salaries from 18 to 24 per cent from July 1, 2005.

The province’s requests to the centre for additional resources to off- set the pay raise remained unheeded.

It contributed to excessive bank borrowings. For most part of the current financial year, the provincial government relied heavily on the State Bank’s ‘ways and means’ facility.

Similarly, the government’s decision to recruit some 3000 teachers in the near future to bring down teacher/students ratio is expected to add further to its financial worries in the years to come as, according to one senior ex-bureaucrat, the move would enhance NWFP’s non-developmental expenditure by over Rs900 million per annum.

The province has been making inflated revenue receipts estimates, at least, for the last two financial years. This practice has particularly been seen under the head of net hydro profit – which the province receives against its share under the income recorded by Wapda from the sale proceeds of hydro power generated at Tarbela and four small power generation units also established in different parts of the NWFP.

Like the 2004-05 financial year, the provincial government has estimated receipts of NHP for the 2005-06 financial year at Rs8 billion despite the fact that the province would not get any thing beyond an amount of Rs 6 billion – the share amount capped under a presidential order since early 1990s.

However, in an attempt to gain political mileage the clergy led provincial government has been recording the NHP proceeds figure at the high side without being able to persuade the federal government and WAPDA to concede its demand. It leads to negative impact. Adjustments under various heads of expenditure are required to rectify the distortions in later part of the fiscal year.

Discrepancies recorded on account of NHP are not the only head under which the provincial government has opted for high revenue projections.

In its revenue receipt estimates for the 2005-06 financial year, the provincial government had estimated Rs5 billion as grant from federal government’ – other than the Rs5 billion that is being provided as subvention under the existing NFC award. No money was received from the stipulated amount by the close of the first three quarters of this fiscal.

Similarly, the provincial finance minister had made the people of NWFP believe that World Bank would release the third tranche of $90 million under SAC somewhere during the second quarter.

The money has not yet been provided. It was clear right at the outset of the current financial year that the third tranche could not come before June 2006 – when a decision to finally release the money would be taken by the Bank’s board of directors meeting in Washington.

Though the provincial government appears to be well placed to get a favourable decision from the board because of its adherence to the conditions laid down under the loan agreement, the non-availability of an amount of Rs5.2 billion has also negatively impacted the NWFP’s budgetary plans.

Meanwhile, the province is once again heading towards a situation where its annual development programme for the 2005-06 would be far behind the actual estimates of development expenditure amounting to Rs21 billion.

Official sources indicate that the development expenditure has lagged behind at the end of the first three quarters. Though the expenditure is expected to pick up in the last quarter, as has always been the case, there is no likelihood that the ADP would be fully materialized.

Nonetheless, the expenditure made so far, shows considerable improvement over the past year. The increase in expenditure has also occurred because of hike in prices of construction materials.