WHILE preparations for the Balochistan budget have entered the crucial stage, the province continues to experience financial crisis on account of its debt servicing liabilities.

One the eve of the next budget to be announced on June 20, the provincial government’s loans with State Bank stands at Rs15 billion after interest payment of over Rs262.7 million.

The province’s financial constraints have thrown it in the vicious cycle of debt and interest payments. The province had obtained Rs19 billion in loans in the 1990s and has paid Rs39 billion as interest and it still needs Rs14 billion more to service its debts. It has, however, failed to recover its dues from the federal government and Sindh.

Balochistan’s Rs9 billion are outstanding against the Sindh government on account of Hub dam water. There are also billions of rupees in gas arrears that are outstanding against the federal government. Whereas the outstanding dues are being recovered by the centre from Balochistan, by deducting amounts at source from transfers , the province’s outstanding dues against centre and other provinces are not being paid. This has deepened the financial crisis.

For instance, in 2003, the federal secretary for states and frontier regions (SAFRON) in 2003 had deducted the amount from Italian grant given to Balochistan on account of the province’s outstanding dues. Italy had provided Rs3 billion for special development programme in those districts of the province where Afghan refugees were settled. The chief minister Jam Yousaf had to protest to the federal government that the federal secretary had no right to deduct the amount.

The provincial government is forced to manage its affairs on loans while the federal government is getting Rs78 billion annually in revenue from gas fields in Balochistan. Senior provincial minister Maulana Abdul Wasay boycotted the meeting of the National Economic Council (NEC) saying that Balochistan had been denied finances and several projects proposed by the provincial planning and development department were not considered in the NEC meetings.

For the past three years, the debt burden of the province is rising for shortage of funds which has increased its debt servicing costs.The previous three budgets were the deficit budgets. A Rs34.835 billion Balochistan budget for 2003-04 recorded a deficit of Rs2.47 billion that was seven per cent of the total outlay.

While the provincial budget 2004-05 had a deficit of Rs9.5 billion, the budget 2005-06 posted a deficit of Rs13.24 billion. The resource constraints forced the Balochistan government to sign an agreement with the SBP to convert its more than Rs10 billion overdraft into a block loan. It also borrowed from Asian Development Bank to repay federal loans.

The social Policy and Development Centre (SPDC) recently conducted a study on “Provincial Accounts of Pakistan: Methodology and Estimates 1973-2000”. According to this study, during the 28 years period, Punjab’s per capita GDP showed a rise of 2.4 per cent a year, followed closely by the NWFP at 2.2 per cent. But Balochistan’s per capita recorded an insignificant growth of 0.2 per cent against Sindh’s per capita growth of 1.7 per cent. The study has found a gradual pauperization of the two southern provinces —- Sindh and Balochistan -— and a corresponding rise in prosperity in the two northern provinces -— Punjab and the NWFP.

Punjab’s share in the GDP has increased by two per cent to 54.7 per cent. The NWFP has by and large maintained its share between 11.4 and 11.7 per cent, but the two southern provinces — Sindh and Balochistan — showed a decline by about one per cent each. Sindh’s share in the GDP dropped to 30.2 per cent from 31 per cent and that of Balochistan to 3.7 per cent from 4.5 per cent.

At the meeting of the National Finance Commission last month, Balochistan had floated a proposal for acquisition of loans from the open market at lower interest rates. The federal government however rejected the idea.

For resolving the debt problems, some suggestions are given below:

First, all the Balochistan’s dues, which are outstanding against centre and other provinces, should immediately be paid to the province.

Second, the centre needs to put in place a mechanism to reduce Balochistan’s loan liability or allow it to borrow to repay cash deposit loans (CDLs) by cheap banking sector loans. The cash deposit loans carry about 17-18 per cent interest rates. Commercial banks are ready to lend money to the provinces at mark-up rates between six and eight per cent.

Under the Constitution, the provinces cannot borrow directly from the banking sector without the Centre’s permission. The Centre has acquired fiscal space by rescheduling of its foreign debts and the same principle should be applied to the cash development loans to provide relief to the poorest province.

Third, the narrow tax base of the province needs to be widened so that the province can generate a revenue of Rs3 billion, almost double of its present revenue. And similarly, revenue base needs to be broadened on year-wise basis during the next five years.

Fourth, the Centre should accept the provinces’ demand to include petroleum taxes and unutilized workers’ welfare fund in the federal divisible pool. According to Syed Ehsan Shah, the petroleum taxes and workers’ welfare fund amounted to about Rs45 billion and Rs15 billion, respectively and inclusion of these two items can increase the size of the federal divisible pool by Rs60 billion. Balochistan’s share could increase by about Rs6 billion,

Finally, the centre should consider writing off the Balochistan loans, as the province has been a calamity hit area for the past one decade due to long spell of drought. It is bearing the high costs of maintaining law and order owing to the military operation currently underway in the province.

According to the Chief Minister Jam Yousuf, Balochistan‘s share in gas royalty has been reduced to Rs1.5 billion due to reduction in gas production as a result of blasting of gas pipelines.

Any initiative by the centre to write off debts may help the province tread on the path of self-reliance.