ISLAMABAD, April 12: The government is expected to cut non-priority expenditure by Rs24 billion to offset the impact of Iraq war on economy.

Official sources said here on Saturday that due to the Iraq war and continued tension on the eastern border, the government will have to apply certain reduction on the budget.

And, initially, they said, it was being considered to cut by Rs24 billion non-priority expenditure of various ministries and divisions.

The government will also cut non-priority expenditure largely by locking in savings already made under various heads through not allowing any reappropriation to different heads, and if needed, by judiciously managing release to the departments during the remainder of 2002-03.

It was said that the government would remain alert to the danger that high broad money growth could eventually translate into higher inflation, and will, therefore, closely monitor inflation developments and prospects, and tighten monetary policy should signs of inflationary pressure emerge.

The sources say that the main risk to the economic outlook, and in particular to the fiscal objectives, arises from the regional tension which have not fully wound down by end-2002 as assumed under the programme’s fiscal projection, even though the beginning of a gradual troop withdrawal on the eastern border is encouraging. An aggravation of tension in the Middle East could also impact the economy, mostly via a possible surge in oil prices.

“If any such risks were to materialize, the government would seek to protect budget balances by enacting further cuts in low-priority expenditures, while protecting key social spending,” a source added. And in this behalf discussions between the federal government and the provinces have held on the new revenue sharing formula.

In case of reversal of the private capital flows, which cannot be excluded if the regional/security environment were to deteriorate, allowing a market-based depreciation and financial tightening, will be the first line of defence, with reserves used only to maintain orderly market conditions.

The sources said the government would ensure that conditions attached to expected loan disbursements of the World Bank and ADB are met.