KARACHI, Oct 28: The State Bank of Pakistan has expressed its concern over low development spending, which, it said, has been curtailed over the last few years as a result of revenue shortfalls.

In the annual report 2001-2002, the State Bank has cautioned that “for too long, the low development spending has effectively led to a deterioration of infrastructure, reducing the economy’s growth capacity.”

Dwelling upon the implications of a low public sector development expenditure, the report points out that it would mean “lowering future government revenues.”

“Thus, in essence, meeting the fiscal deficit targets through low development spending was equivalent to shifting the fiscal deficit targets to the future generations,” the report added.

The report asked policy-makers to note that higher development expenditures not only increase aggregate demand but also have substantial “crowding-in” effects on private investment.

In the outgoing fiscal year, the consolidated development spending of both federal and provincial governments was budgeted at Rs130 billion but the provisional figures show that the actual spending at Rs123.6 billion was short of the set target. It has marginally improved from 3 per cent of the GDP in 1999 to 3.4 per cent in 2002.

Responding to a question from a foreign journalist as to how can Pakistan achieve a higher growth rate if investors shy away, finance minister Shaukat Aziz had said last month that “we have a number of possibilities. We are looking at higher public spending plus a better performance by agriculture.”

With the elected coalition government to take over next month, pressures are expected to mount for increased development spending. Finance minister Shaukat Aziz, who may continue as finance minister, would have to find fiscal space for increasing development spending.

A PML(Q) candidate for premiership recently said that his party would accept those portions of the IMF reforms that are beneficial for the economy and would launch poverty reduction programmes that create jobs and broad-base prosperity.

The State Bank report has also reminded the government to keep its promise to enhance development spending.

In fiscal year 2003, a sum of Rs134 billion has been earmarked for development spending. And the government has pledged to increase development expenditures and to insulate this spending from below-revenue targets by incremental revenue measures and reduction in non-development spending.

Pakistan’s economic growth has suffered from low levels of investment as well as low development spending. The policy-makers have shied away from enhancing development spending, with fiscal stabilisation taking priority.

The SBP report shows investment to GDP ratio declined for the second consecutive year, from 16 per cent in fiscal year 2000 to 13.9 per cent in 2002.

Typically, energy consumption is closely related to economic development. As economic growth experienced deceleration over the past two years, growth in commercial energy consumption has plunged to 1.5 per cent from 7.6 per cent.

In present economic slump, the United States has opted for a fiscal stimulus to revive the economy that has turned the budget surplus into a deficit. In European Union, the fiscal deficit target of 3 per cent has become a controversial issue, with at least two EU members unable to keep to their commitments. Germany, hit by slump and lower revenues, is unlikely to stick to EU fiscal target.

Analysts say that Pakistan may have settled for a deficit between 5-6 per cent to boost development spending and economic growth.