Shrinking spending

Updated 06 Jul 2020

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The actual development spending this year has been revised down to Rs255bn on the back of a massive revenue gap of Rs581.4bn.
The actual development spending this year has been revised down to Rs255bn on the back of a massive revenue gap of Rs581.4bn.

PUNJAB is struggling for resources to ramp up its annual development spending for the last couple of years. The economic contraction induced by the tough macroeconomic environment and the global Covid-19 pandemic has made it even harder for the Usman Buzdar government to spare enough cash for the development of social and economic infrastructure in the current year’s budget.

Over the last few years, the original allocations for development schemes have gone down from Rs635 billion in 2017-18 to Rs308bn in the last fiscal year. Similarly, the actual utilisation of funds has fallen from Rs411bn to Rs178bn during this period, according to the provincial budget documents.

The actual development spending this year has been revised down to Rs255bn on the back of a massive revenue gap of Rs581.4bn –including a shortfall of Rs473.6bn in the federal transfers to Punjab and Rs103.9bn in the province’s own tax source — in the originally projected income of Rs1.989 trillion owing to the difficult macroeconomic and business environment, which was worsened by the countrywide lockdown. To maintain the revised development budget at the level of the previous fiscal year, the government was constrained to partially fund it through federal loans.

Read: Punjab failing to boost tax collection

According to the government, the last financial year posed various economic challenges for Punjab. “The pandemic has tested the healthcare system of the province while causing a massive decline in economic activity, especially in the services and industrial sectors that make a major contribution to the provincial GDP growth,” stated budget documents.

The provincial development strategy hinges on how the pandemic evolves over the next six months and if the federal and provincial tax agencies succeed in achieving their targets

In order to meet the challenges posed by the virus, which the government expects to last at least through the first half of the present fiscal year to December, the provincial planning and development board has formulated a new Post-Covid-19 Public Investment Strategy – Responsive Investment for Social Protection and Economic Stimulus. The strategy, which replaces the Punjab Growth Strategy 2023, presents targeted interventions and policy responses to contain the Covid-19 crisis and includes an annual development programme (ADP) prioritisation framework to set the direction for its development programme for the current year and support development of the Medium-Term Development Framework.

The new development strategy argues that the government needs to spend heavily on development to grow the provincial economy and create jobs for millions who have lost employment because of the health crisis. It estimates that the government will have to increase its development stimulus to Rs850bn by 2022-23 to push the provincial economic growth rate to seven per cent and had recommended doubling development spending during the ongoing financial year. However, in the absence of enough increase in the development investment stimulus, the provincial economy is projected to grow by just 3pc in the next three years.

The growth rate for 2019-20 was already slowing down (during the pre-pandemic period) because of a tough period of stabilisation, say the budget documents. “The estimates of international agencies suggest high cumulative losses to the provincial GDP owing to the Covid-19, which may reverse progress on unemployment and poverty in the province. Taking account of this significant exogenous shock, the revised provincial GDP growth trajectory for Punjab over the next three years suggests that the economy will reach a growth rate of around 3pc by 2023.”

To make up for the shrinking provincial contribution to the development programme, the planning and development board is focusing on raising additional funds through foreign bilateral and multilateral sources as well as implementing a plan to leverage private investment in infrastructure projects to complement its own development effort. For example, a break-up of the estimated provincial ADP for 2020-21 shows that almost two-fifth of the total allocations of Rs337bn will come in the shape of foreign loans, including a Chinese loan of Rs40.8bn for the incomplete Lahore Orange Metro Train Project, to make up for the reduction in funding for development schemes from the provincial resources.

Similarly, the provincial government is expecting private investment of Rs25bn in different road infrastructure development schemes in the province during the current year. The budget for the last financial year had projected private investment of Rs42bn in Public-Private Partnership (PPP) mode. However, the target could not be realised.

Punjab has already reformed its regulatory mechanism of PPPs through the PPP Act, 2019, with a view to remove the existing bottlenecks and facilitate the private sector participation in infrastructure and public service provision. The PPP Act envisages a diverse institutional arrangement for regulating the PPPs in Punjab and developed a potential three years PPP Rolling Business Plan — a roadmap developed in 12 sectors in view of the fiscal constraints and scarce public funding for the overall development portfolio of the province. Under this plan, 38 projects amounting Rs488bn have been identified and are being planned for launch under the Punjab Private Finance Initiative. A Project Development Facility funding has already been approved for 20 such projects for hiring of transaction advisors/development of detailed project proposals.

However, the officials say, the entire provincial development strategy hinges on how the Covid-19 pandemic evolves over the next six months and if the federal and provincial tax agencies succeed in achieving their targets for the year to create room for the projected development spending. The willingness of private investors in the infrastructure development schemes will also depend largely on how the economy moves in the months to come. If the slowdown persists as is being widely forecast, the government may not be able to attract any significant private investment except in a few schemes like ring roads in Lahore and Rawalpindi for which the deals have already been closed.

Published in Dawn, The Business and Finance Weekly, July 6th, 2020