ISLAMABAD, Feb 17: The government is likely to increase the salaries of its employees in the new budget, Dawn has learned.

According to sources the government had been advised by budget planners to increase the salaries of government employees by further reducing the interest rate of national saving schemes and by borrowing from the country’s banking system on a reduced markup rate.

The current 4.7 per cent GDP fiscal deficit (Rs166 billion) has reportedly been planned to be reduced by not financing the budget through the national saving schemes that cost roughly 10 per cent interest rate. Instead, it was being considered to borrow at 3.5 per cent interest rate from the banking system which now has an excess liquidity.

The sources said it was being asked why the government should help the rich get richer by investing in saving schemes where they receive 9 to 10 per cent profit rate. “Now when the government is extending 11 per cent profit rate to pensioners, there is no justification for extending increased profit on national saving schemes, and that too to the rich classes, asked a source.

He said that the government has a “golden opportunity” to deal with its domestic debt and allocate more resources for social sectors, poverty alleviation and increasing the salaries of government employees. “There is a lot of new fiscal space available to do something for the poorer sections of society including increase in salaries of the government employees in the 2003-04 budget,” he added.

Sources said that the government has been advised to fill revenue expenditure gap by not seeking resources through the national saving schemes which has created a debt burden of Rs815 billion.

This amount of Rs815 billion has gone into budget deficit.

It was said the government could now seek highly concessional external lending at 0.7 per cent interest rate on International Development Association (IDA) terms to finance its budget rather than looking for funds coming through the national saving schemes.

Meanwhile, it was also learnt that the government was finalizing a strategy to reduce its $36 billion external debt, specially by repaying expensive debt as early as possible. The most expensive debt amounting to about 900 million had already been retired by the State Bank of Pakistan.

The external debt, sources said, will be reduced in three phases. First phase will deal with those loans on which the government was paying more than 12 per cent interest rate. These loans amounted to about $2 billion and related to Independent Power Producers (IPPs). In the second and third phases, external loans having 5 to 11 per cent interest rate will be taken up for their early retirement.

A decision has been taken that the government will keep with itself $10 billion foreign exchange reserves which were sufficient for 11 months of imports. And now new reserves coming in the kitty will be used for debt retirement.

The prepayment of foreign loans, sources said, will further improve the country’s credit rating in the international capital market.