The conversion of its more than Rs51 billion overdraft facility with the State Bank of Pakistan (SBP) as it stood on July 31 into a soft loan has reinforced the public perception about the government’s ability to manage the provincial finances prudently during crunch times.

The loan is payable in four years. That means an additional financial burden of more than Rs1 billion a month on the provincial revenue resources.

In the wake of rising debt servicing burden and possible shortfall in the federal transfers for another year, the critics insist, it would be difficult for the government to escape problems in meeting its ambitious budgetary targets. Moreover, they say, Shahbaz Sharif’s government is sure to overrun expenditure if it continues to dole out huge, unproductive subsidies in the form of sasti roti and sasta atta (during the month of Ramzan).

‘Such schemes are always politically motivated. The chief minister, it appears, is preparing for mid-term polls,’ argues a senior official, who asked not to be named, because of the sensitivity of the matter.

The provincial government had spent nearly Rs17 billion on food subsidies during last financial year. Much of these subsidies had gone into supporting sasti roti scheme. The support for this scheme has since been scaled down. The subsidised sasti roti (at Rs2 a piece) is now available only in poorer localities as it is meant for people who cannot afford Rs5 roti, an official of district administration says.

A part of those subsidies was spent to provide cash support for the poor in the province to counter the nationwide Benazir Income Support Programme (BISP) of the federal government of the Pakistan People’s Party. That project too ran into problems as the provincial government had launched it without evolving a proper strategy for cash distribution and preparing computerised lists of the deserving people. The government has itself acknowledged that a large portion of the cash meant for the poor did not reach them and was pilfered on the way. The scheme has since been abandoned.

‘The provincial effort to provide cash to the poor to support their monthly incomes failed because of its dependence on informal channels of cash distribution like on the recommendations of the ruling party’s legislators or its unelected leaders. It was bound to flop since the government did not undertake any exercise to identify the deserving people and computerise their lists to preclude or minimise the possibility of misuse or pilfrage. It was basically launched to counter the BISP in Punjab,’ a senior official who has remained associated with the Punjab’s food support programme says.

The sasta atta scheme aimed at providing heavily subsidised wheat flour at Rs10 a kilo against market price of Rs25 for one month during Ramzan is also alleged to have been grossly misused and is unlikely to be repeated next year. The scheme has cost the province more than Rs8 billion.

‘When a scheme is launched on an ad hoc basis for short-term political gains, it is bound to fail. That’s why a chunk of all the so-called pro-poor subsidies has ended up in the pockets of those who did not deserve those benefits. The people who manage the provincial finances understand this but cannot do anything when the ruling politicians throw their weight behind such lavish but useless projects,’ a source in the chief minister’s secretariat says.

While the opposition alleges that such extravagant policies of the Shahbaz government during current sluggish economic conditions could result in overruns in provincial expenditure, keepers of the finances don’t see such a possibility. ‘We have set aside Rs26.7 billion for pro-poor subsidies in the budget for the current year. The money spent on the sasta atta scheme is covered under that amount,’ says a senior finance department official.

He rejects all objections to the government’s financial policies, saying there had been no expenditure overruns even during the last fiscal when the provinces had to face an overdraft situation.

‘We had to borrow heavily from the SBP last year due to shortfall in federal transfers to the province and not because of any overruns in our expenditure,’ argues the official.

He claims that there was a shortfall of Rs33 billion in total federal transfers to Punjab in 2008/09. Punjab is heavily dependent upon federal transfers, which cover more than 80 per cent of its total revenues. The rest are covered by province’s own tax and non-tax revenues and foreign loans.

‘In addition, we also did not receive our share of Rs3.8 billion in net hydro profits of Ghazi Barotha Hydro Power project. Had there been no shortfall in the federal transfers due to lower tax collection by the Federal Board of Revenue (FBR) and the issue of net hydro profits settled last fiscal, we would have been a net borrower of only Rs5 billion from the SBP last fiscal rather than of Rs42 billion and nobody would have even noticed it,’ he insists.

Punjab had actually received just Rs16 billion less than its projected share of Rs284.6 billion from the federal divisible pool.

The rest of the loss in revenue was due to a cut of Rs6 billion in federal grants and a shortfall of Rs12 billion in provincial tax collection. The province could also not realise ‘extraordinary’ revenue receipts of Rs17 billion it planned to raise from the sale of state land.

‘The uncertainty about the federal government’s ability to collect targeted taxes is the major cause for the overdraft situation faced by us last fiscal. In December last year, the federal government revised upwards its tax collection target to Rs1.36 trillion from Rs1.25 trillion on the IMF’s insistence. That meant additional revenue of Rs21 billion for Punjab. The upward target was slashed to Rs1.3 trillion in less than two months. It still meant additional funds of Rs12 billion for us. But the total collection fell to less than Rs1.2 trillion at the end of the year!,’ the official says.

The official calculation of the shortfall of Rs33 billion in the federal transfers to Punjab is also based on the upwardly revised tax collection targets rather than on budgeted target.

‘The people, including those trying to accuse us of financial indiscipline, must understand that we had to rely on borrowing from the SBP due to the shortfall in our revenue surplus on account of lower than expected federal (and provincial) receipts and not because of expenditure overruns,’ the official contends.

The officials also brush aside concerns that the province could face another overdraft situation this year as well. ‘The SBP has already capped our overdraft ceiling at just above Rs27 billion to impose financial discipline unlike our previous year’s total borrowing of close to Rs175 billion. That precludes the possibility of running into an overdraft situation,’ says a source in the provincial cabinet who was critical of the Punjab government for adding to the province’s debt burden and failing to control its expenditure.

He says it is unfortunate that the SBP had to move to impose financial discipline in the province. The officials insist that the Punjab government would not face any dire financial constraints this year in spite of a shortfall of over Rs16 billion in federal transfers to the province during the first quarter to September of the current financial year due to lower than targeted tax collection. They are hopeful that the tax collection will improve in the months to come.

‘In addition, we are set to receive Rs34 billion in budgetary support from the World Bank and the Asian Development Bank this fiscal,’ an official says. The government has already obtained Rs12 billion from ADB. The rest of the funds are expected to be released in February.

‘We managed to do well within our budget without any expenditure overruns last fiscal and we are not going to run into budgetary problems this year either. Nor is there going to be shortage of funds for development,’ the official insists.