The government of Punjab intends to capitalize a part of its debt being accumulated in the form of the GP (General Provident) Fund by setting up a fully-funded fund to "profitably manage" the ever increasing liability.

The provincial finance department has already moved a summary, seeking the approval of the chief minister to notify the proposed fund for capitalizing this liability. The approval of the summary will be followed by drafting of a law to govern the establishment and operations of the fund.

The entire procedure is expected to be completed by the end of the current financial year 2004-05 to pave the way for the launch of the fund from July 1, 2005, that is, the beginning of the next financial year.

The fund is being set up outside the budget in order to remove the "burden" on the provincial exchequer. However, the government would continue to put all GP Fund receipts into the proposed fund for some seven years, after which it is expected to become "self- sustaining", allowing the government to make all GP Fund payments to its employees from it.

The fund will be managed by professional financial experts who would be empowered under the law to take decisions for profitable investment of the fund. The fund is being created as a part of the Punjab government's Debt Management Strategy, devised a couple of years ago to reduce the province's high cost, increasing debt burden that was already eating into whatever meagre financial resources were available to it for priority areas of infrastructure and social sector.

Actually, the officials have long been insisting that the high cost of debt servicing incurred by the province was squeezing the fiscal space for development with every passing year.

It was feared that if the expensive debt was not taken care of and replaced with cheaper loans forthwith, the province would not be able to fund its development requirements in the years to come and end up paying a major chunk of its resources in servicing its debt.

The provincial government began to execute its debt management strategy from the last financial year by obtaining low cost loans from the Asian Development Bank and the World Bank for using them to retire expensive federal debt.

A cash strapped Punjab had accumulated high cost federal debt in the form of Cash Development Loans (CDLs) during the 1980s and 1990s for its financing development.

Helped by better financial management and enhanced own tax and non-tax receipts as well as increased funding from Islamabad, the province managed to discontinue borrowing CDLs after 1999.

But by that time it had already accumulated huge stock of expensive CDL loans, which subsequently push up its annual spending on the debt servicing. The weighted average of interest cost on the federal loans was calculated to be 14.44 per cent against the average cost of 1.094 per cent on the foreign loans.

Through execution of its debt management strategy, it has been possible for Punjab to prematurely retire two CDL loans of Rs12.5 billion in the last fiscal year by swapping them with the cheaper facilities obtained from the Asian Development Bank and the World Bank for the Punjab Resource Management Programme (PRMP) and the Punjab Education Sector Reform Programme (PESRP).

The early retirement of a part of its unmanageable CDL stock is said to have created a fiscal space of Rs1.700 billion by marking down interest payment to Rs9.887 billion in 2004-05 from Rs11.744 billion in 2003-04.

It has also cut down the share of the federal loans to Rs68.449 billion, or around 44.45 per cent of the entire debt liability of Rs153.843 billion on the province as of June 30 2004.

Actually, the share of low cost foreign loans in the entire debt has slightly surpassed the share of the federal debt to some 44.65 per cent, which is said to be a healthy sign for the future development of the province.

The provincial government intends to retire federal debt of Rs11.391 billion during the current fiscal year and Rs10.578 billion next year from the proceeds of the PRMP and PESRP.

The government hopes to save hefty sum of Rs10 billion by 2008 on debt servicing through its strategy of early repayment of the expensive loans, compared to the situation if no loans are retired in the next three years.

While Punjab has been bringing down its expensive federal debt for creating greater fiscal space for enhancing its future outlay for development, its debt on account of the GP Fund accumulation is on the rise.

At the commencement of the current financial year, the GP Fund liability of Punjab was estimated at Rs16.270 billion or 10.8 per cent of its entire debt stockpile. Though the interest paid on it has been brought down to 14.5 per cent in the recent years, it is still a burden on the current expenditure.

The allocation for the interest payments on the GP Fund has increased to Rs2.157 billion in the estimates for the budget 2004-05 from Rs590 million in the year 1990-91 and is likely to rise further in the years to come.

In addition to the interest payments on the GP Fund liability, the provincial finance department has also realized the fact that payments (Rs3.953 billion in 2003-04 and Rs4.661 billion in 2004- 05) made from it have already overtaken receipts (Rs3.825 billion in 2003-04 and Rs4.312 billion in 2004-05).

Disbursements from the GP Fund in 2009-10 were estimated to be Rs10.616 billion as against receipts of Rs7.851 billion into it. The situation spawned fears that the provincial government may eventually have to pay the liability from its "own resources" in the years to come.

The Task Force, with former federal minister for privatization Altaf Saleem as its chairman, set up by the government to suggest GP Fund and pension reforms last year had actually stressed that after 2016 the government will need to put additional resource of Rs65 billion into the GP Fund if it was not capitalized.

It means that the impact of the government efforts to cut down its federal debt with cheaper loans from the multilateral donors for creating fiscal space for social sector and infrastructure would be offset by the increasing GP Fund liability. So what to do now to prevent such an eventuality from happening?

Taking a cue from the Task Force report on pension and GP Fund reforms, the finance department decided to set up a fund "outside the budget to be managed by professionals hired from the market".

As the first steps towards profitably managing its pension and GP Fund liabilities, the provincial government has already issued a notification to create a pension fund and moved the summary for permission to notify the GP Fund.

Once the approval is granted and the laws passed by the Punjab Assembly, both liabilities will "cease to be part of the budget", taking care of the financial woes of the finance department.

While nobody would dispute the provincial government's efforts to lower the huge debt, which is ultimately paid by the citizens, and generate additional resources for the development outlay, the official spending priorities remain an enigma for most people.

It has been noticed that many large infrastructure projects launched by the government during the last couple of years are politically motivated rather than dictated by the needs of the people. One wonders if the provincial government would care to review its priorities and put the money where it is most needed.