KARACHI, March 20: The State Bank has expressed its concern over the government’s current expenditure growing much faster than development spending during July-December 2002.

Noting the spending trend, the State Bank has expressed its disappointment and cautioned that “improvements in the fiscal deficits generated through low development spending is not desirable for the economy in the long-term.”

According to the State Bank second quarterly report, the 9.6 per cent increase in government expenditures in first half of current fiscal year compared to corresponding period of last year “was concentrated in current spending, rather than on development.”

The comparative figures for development spending were Rs51.5 billion (H1-FY03) and Rs50.9bn (H1-FY02), or a slight increase of Rs0.6bn.

On the other hand, the current expenditure rose simultaneously from Rs296.7bn to Rs345.1bn or by Rs48.5bn.

During the current fiscal, Rs134bn has been earmarked for development spending both by provincial and federal governments, against last year’s allocation of Rs123.6bn. The budgeted amount for federal development spending both on capital and revenue accounts has, however, been reduced by Rs6.5bn to Rs105.3bn.

The State Bank found it a “little disappointing that the rise in the overall expenditures was not primarily due to higher development spending.” The SBP, however, expects that development spending would increase in the second half of the year on account of development plans of the newly-elected federal and provincial governments.

As it would appear from the SBP quarterly report, the central bank expects enhanced development spending to spur economic growth.

The State Bank reckons that the main stimulus to the economy in the next two years would be provided by larger public sector development expenditure and higher agricultural production.

An increase in Public Sector Development Plan (PSDP) has become feasible in view of the

SBP concern fiscal space provided by reduced debt burden and growth in revenues, says the SBP report. Agriculture, hit by prolonged drought, is expected to resume its historical growth as water availability normalizes.

The SBP report, however, notes the spurt in consolidated expenditures is due to Rs35.3bn (50 per cent year-on-year) rise in provincial spending, though the current expenditure of the federal government also saw a rise of Rs13.2bn in the same period. The provincial current expenditures rose from Rs69.9bn to Rs105.2bn.

And this massive increase in provincial government expenditures is largely attributed by the SBP report to expanding economic and administrative activities of the district and the newly-elected provincial governments.

A break-up of the federal government expenditures reveals a reduction of Rs25.6bn in interest payments on domestic and foreign debt which created the fiscal space to absorb a jump in defence spending. Defence spending went up by Rs22.4bn from Rs54.2bn to Rs76.7bn.

Clearly, says the SBP report, if the macroeconomic stability has to be maintained, provincial governments will also need to shoulder greater responsibility in managing their budgets.

“It is imperative that spending increases should be focussed in pro-growth areas such as health, education and infrastructure, which deliver sustained economic benefits in investment, employment and production.”