Sindh’s discomfort with surging foreign debts

By Sabihuddin Ghausi

Mounting foreign loan burden has started telling on the nerves of Sindh’s economic managers. Officials at the Sindh Secretariat at Karachi complain of inflated cost of foreign funded projects that are thrust on them. “ All projects are virtually designed by the donors but are attributed to us without the consent of provincial political leadership and the concerned officials,” confided an official.

Foreign loans came initially as a blessing to the provinces from the year 1999-00 onwards when the federal government stopped providing Cash Development Loans (CDLs). Sindh and Punjab used some of these foreign loans to adjust their expensive CDLs with Islamabad. It helped them reduce debt liability and create space for more development spending in their budgets. But for last three years, the inflow of foreign loans for mega projects is straining the provincial budgets.

Officials in Sindh complain as to how their province was singled out to be declared as a badly governed province, afflicted with law and order, corruption and a weak public service delivery system in a World Bank report. This report criticised the financial management, education system and other service delivery mode of Sindh. The World Bank estimated Sindh’s GDP at 28 per cent of the national GDP as against 32 being estimated by the provincial economists. It was all done because Sindh government was reluctant to accept World Bank and ADB offers of assistance. The World Bank report on Sindh economy has yet to receive official approval from the provincial government. In fact an official rejoinder questions the finding of the World Bank team.

For the last three years or so, there have been about a dozen mega projects in Sindh, more than 18 in Punjab and 15–16 in Balochistan in which both the provincial and federal governments are involved. Almost all the big projects in which provincial finances are involved are still in the early stages of implementation and planners in Karachi fear a massive cost over runs because of “the painfully slow release of funds’. They fear a further push up of project costs which they believe , is already inflated. The projects will need more funds, fresh negotiations for additional loan amount and more burden on the provincial economies.

A cursory glance of the 2006-07 budget of the four provinces reveals that there is a total burden of more than Rs190 billion foreign loans and about Rs145 billion cash development loans. Sindh’s liability for payment of cash development loans (CDL) amounts to Rs28 billion while the foreign loan burden has increased to Rs71 billion. Punjab now carries a total debt burden of Rs143 billion that includes Rs73.61 billion CDLs and Rs69.78 billion foreign loans. The NWFP shows Rs22.26 billion CDL liabilities and more than Rs49 billion foreign loans. Balochistan carries more than Rs51 billion loans but no figures are available of a break-down of foreign and domestic loans.

“The foreign loan burden on Sindh will increase to Rs79 billion by the end June next. More than $2 billion loan (Rs120 billion) is being negotiated with the Asian Development Bank (ADB) and other donors. The government is negotiating $500 million to $800 million for Mega City project. Officials are also exploring possibility of acquiring a big loan for education.

Diamond city and Sugar town are the other projects being marketed for development of Karachi beach for which there are expectation of foreign investment and funds from the international agencies.

In the current fiscal year, Sindh will repay more than Rs3 billion against foreign loans and interests while more than Rs8 billion will go for paying the interest and principal amount of CDL to Islamabad. .

‘The CDLs carry interest rate from 14-18 per cent and the mode of debt servicing payment is such that bulk of the amount goes towards interest while only a small amount adjusts the principal amount. Officials explained that Islamabad provided about Rs60 billion CDLs to Sindh from 1973 to 1999-00. Against this total loan amount, the Sindh government has paid back about Rs130 billion which adjusted only Rs30 billion principal sum and Rs100 billion went to payment of interest. . The federal government works out the monthly instalment of annual debt servicing of each province and deducts the amount from its share of federal tax pool. “We have still to pay Rs28 billion’’, the official said who estimated outflow of nearly Rs130 billion in next 20 years to clear the Rs28 billion unpaid loan.

In last four years, the Sindh government used part of the loans obtained from World Bank’s Structural Adjustment and Asian Development Bank Devolved Social Services Programme to adjust

Rs15.58 billion CDL and market loans. “We managed to save Rs1 billion annual debt servicing from our budget’’, a senior official said.

In the years 2001, 2002 and even in 2003 when interest rates on commercial loans of banks were quite low, the provinces including Sindh made repeated pleas with Islamabad to allow them to seek loans from the banks to clear CDL loans. Even now when interest rate is in double digit, the Sindh government has sought permission to adjust remaining outstanding loan from bank credit because there is still a difference of 6-7 per cent on interest rates.

But officials in Sindh government got panicky in the year 2004-05 when foreign loans liability swelled to Rs74.50 billion from Rs62.12 billion in 2003-04. A jump of Rs12 billion or $200 million in debt liability without any tangible asset was something that could attract a lot of criticism.

There are also other reasons to be sceptical about the international donors’ assistance. The Social Action Programme (SAP) was taken up with Rs86 billion assistance over a period of more than eight years during the 80’s and the 90’s. It has proved to be a colossal disappointment. What remains of this project are a few dilapidated buildings constructed for schools and dispensaries. There has not been any improvement in healthcare or children enrolment in schools.

Retired General Moeenuddin Haider who was Governor of Sindh during 1997 to 1999 disapproved of Korangi Sewerage Project that involved $75 million assistance by the World Bank. “I found it too cost inflated’’, he told this correspondent. He asked the planners as why Pakistani engineers cannot take up this project with local technology. Ishaq Dar, the then Finance Minister informed him that the project has some foreign policy dimension. This is also applicable to other projects.

Then there is the much talked about Left and Right Outfall Drainage Project with a massive financial outlay. Poor project design and faulty implementation uprooted the people in Delta region of Sindh.. A World Bank team itself found how badly the project was designed and executed. However, no one was held responsible for the mistake for so much human suffering.

The available information reveals that there are 39 IDA funded projects with an outlay of Rs39.46 billion. Officials are convinced that none of these projects need foreign funding or technology. These projects pertain to primary education, agricultural research, flood drainage, ground water, Karachi water supply and farm water management. There are 27 ADB funded projects with outlay of Rs25.62 billion, six US AID funded, two IFAD funded, and six projects being funded by foreign countries’ grants and other donors.

Most of these projects can also be designed and implemented by Pakistan where dams and barrages have been built, canal network constructed, education and health programmes have been executed over several decades. Although no official word is available from Lahore, officials in Karachi say that Punjab government’s financial position is also not sound. A traditionally cash surplus province is said to be under pressure of low cash flow as its resources are stuck up in massive foreign funded projects. The NWFP is far from happy and Balochistan is virtually a pauper.


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