PESHAWAR, Feb 21: The Federal government would revise the rate of interest on loans it extended to the provinces in the next year's budget in fulfilment of the provinces demand.

An announcement to this effect was made by Finance Minister Shaukat Aziz at a press conference here on Saturday.

"The rate of interest on provinces' rupee loan would be revised in the next year's budget," the finance minister said.

The provinces had been demanding that the federal government should share with them the fiscal space available with it as a result of rescheduling of part of its loans.

In reply to a question, Shaukat Aziz said the next year's budget would involve provisions to adjust rates of interest on the rupee loans payable by provincial governments to the Centre.

He was asked about the federal government's plans to share with provinces the financial relief it got after getting several of its external loans rescheduled in the recent past.

According to official sources, the Centre has refused to allow the NWFP to retire ahead of schedule part of its expensive debt taken as cash development loan by successive provincial governments to support development activities.

The sources said the NWFP wanted to retire part of its expensive loan, in the recent past, in continuation with its earlier executed move of prematurely retiring some Rs7.7 billion expensive loan during the last 18 months.

"However, the federal government did not allow the province this time, taking the stand that the move would create discrepancies in its capital revenue receipts plan for the current financial year," said a source.

The provincial government has been seeking reduction in the interest rate on its loans, taking the plea that a significant fall in the rate of return on loans has been recorded in the open market, but the federal government is still charging high rates under old agreements.

In some cases, provinces are paying as high as 17 to 18 per cent interest rate on cash development loans. The sources said provinces had also recommended to the federal government that they be allowed to secure cheap loans from the open market to prematurely retire their expensive cash development loan.

However, they have not received a positive response from the federal government till Saturday when Mr Aziz, for the first time, showed the Centre's readiness to bring down rate of interest on rupee loans recoverable from the provinces.

"The decision would certainly benefit provinces," Mr Aziz said.

He said the federal government had prematurely retired expensive foreign loans and the savings made on account of interest payment would be spent on social sector development.

"It is for the first time that other than the NFC, we (the federal and provincial governments) are helping each other in many ways," the minister said, adding that the federal government was already helping provinces in getting foreign loans to support their development initiatives.

"Without the federal government's guarantees, it would not be possible for the provinces to get loans from external sources," said Mr Aziz. In addition, the federal government was also taking the responsibility for the foreign exchange risk involved in foreign loans, he added.