THE complexion and size of Punjab’s debt, as a ratio of its gross domestic output, has changed over the last several years, significantly reducing the pressure of interest payments on its budget.

Indeed, the province’s debt has surged by a hefty Rs107bn in absolute terms to Rs452bn, from Rs345.5bn three years ago. Yet, it has come down by 1pc to 3.5pc of the size of the provincial economy during this period. And this is not all. The share of long-term concessionary loans from multilateral lenders like the World Bank and the Asian Development Bank (ADB) in the total debt stock has jumped to 94pc from 85pc, and the size of expensive domestic debt plunged to 6pc from almost 15pc.

Provincial finance department officials describe the changing complexion of the debt as a major success. “The shift from domestic borrowing to foreign loans, for example, has helped us save Rs5.5bn on interest payments during the last financial year, when compared with interest payments of more than Rs20bn in the fiscal year 2010-11,” an official told Dawn. The savings on debt servicing and interest payments, he says, have released resources that can be diverted to development and improvement of public service delivery.

The major success in cutting the debt burden on provincial resources was achieved because of significant improvement in flow of financial resources under the 7th NFC award, say Punjab government officials

The debt management policy to replace expensive domestic federal loans with much cheaper multilateral or bilateral funds was prepared in the early 2000s by the government of then-Chief Minister Pervez Elahi as part of a fiscal and governance reforms programme funded by the ADB. The major success, according to the officials, in cutting the debt burden on provincial resources was achieved in recent years because of significant improvement in flow of financial resources under the seventh National Finance Commission (NFC) award.

“There is no doubt that some effort has been made by the provincial government to improve its own tax and non-tax resources and control unproductive expenditure. But the real difference has been made by the hefty increase in the provincial share from federal taxes,” the official conceded.

The shift from domestic debt to foreign loans has helped Punjab save Rs5.5bn on interest payments in FY14

He was of the view that Punjab’s debt-to-GRP (gross regional product) ratio would have declined more rapidly had the economy not slowed down because of massive energy shortages in the province, as well deterioration in security conditions — the two major factors keeping investors from bringing in their money.

“Going forward, we expect the economic growth rate in the province to recover to 8pc a year in the next four years, provincial taxes to increase, and federal transfers under the NFC to rise. These factors will not only help Punjab meet its development requirements from its own fiscal resources, but also contain and reduce its outstanding debt stock as a percentage of the size of the provincial economy,” he concluded.

The provincial government is paying an average interest rate of just less than one-and-a-half per cent on its foreign debt, against more than 13pc on domestic borrowings. In 2013-14, according to the provincial budget documents, the programme loans or non-project aid constituted half of Punjab’s foreign debt portfolio (Rs213bn). The remaining half came in the form of project aid.

“The project aid appears to be focused on irrigation (19pc), agriculture (8pc), roads and infrastructure and housing and water supply (5pc each), and education and training, governance and social welfare (3pc each). Programme aid, on the other hand, was primarily devoted to three sectors: education, governance, and poverty reduction.”

The only risk associated with foreign loans, officials say, relates to exchange rate fluctuations. “The favourable appreciation of the rupee against the dollar during the second half of the last financial year has cut the size of foreign debt by over Rs3bn. If the rupee depreciates in the months to come, as is being forecast by some, our foreign debt stock will also rise,” he said, adding that the exchange rate risk is always borne by the provincial governments.

The provincial authorities see the debt-to-GPR ratio declining to just around 1pc through financial year 2021. “Our outstanding debt is already very small when compared with the size of the economy. But we want to cut it further and replace all the expensive loans,” the official said.

The low debt level of Punjab, according to a World Bank report published in 2012, is “perhaps not surprising given the historical barriers to borrowing imposed at the federal level. But this has changed profoundly with the enactment of the 18th constitutional amendment, which has allowed provinces to borrow domestically and externally, subject to limits imposed by the National Economic Council.”

Apparently, with the expected improvement in the flow of federal transfers, the declining trend in Punjab’s debt to GRP ratio is likely to continue over the years, unless a major shock or combination of shocks reverses the process.

Published in Dawn, Aug 4th, 2014