Pakistan's capacity to absorb project loans by multilaterals/bilaterals is severely limited however interest begins to accrue on loans as soon as they are formally approved by multilateral/bilateral boards of directors/governments. The reason for the low absorption capacity is that most project assistance has a component of counterpart funds which must be identified in the budget and require subsequent release for the project to be implemented as per schedule. As has been made evident for the past several decades, Pakistan's domestic resources are grossly inadequate to meet our current expenditure, leave alone development expenditure - a fact which accounts for governments, previous as well as the incumbent, slashing development expenditure with the objective of achieving a more sustainable budget deficit than would otherwise have been possible.
In the budget for the current year, for example, the current expenditure is projected at over 3.8 trillion rupees while the overambitious target for total tax revenue unlikely to be achieved if past performance is anything to go by, and which includes dedicated taxes like gas infrastructure development cess and natural gas development surcharge, is projected at 3.9 trillion rupees. To get a true picture of what is achievable, it is pertinent to note that last year, the current expenditure was 3.5 trillion rupees while the total tax revenue, inclusive of dedicated taxes, was estimated at 3.4 trillion rupees or in other words, our total tax revenue for the year was unable to meet current expenditure, leave alone development expenditure. This has been the situation for decades and during the current tenure of the Dar-led Finance Ministry, the shortfall has been met through heavier than ever reliance on external borrowing.
After the cessation of the International Monetary Fund programme in September last year, there was a marked reduction in programme or budgetary support by other multilaterals/donors - from 324.6 billion rupees last year to 133.7 billion rupees budgeted for the current year. The reason: multilaterals/bilaterals comfort level associated with strict monitoring of programme conditions by the Fund has understandably evaporated. This in turn led the Sharif administration to borrow heavily from the commercial sector abroad piling up the short-term debt repayments while interest on long-term loans from multilaterals/bilaterals also began to pile up without any increase in social or physical infrastructure (envisaged in approved projects) that would have fuelled economic activity or a double whammy if you will.
Additionally, delays in project implementation are also attributed to lack of transparency in the bidding process prompting the lending agency to direct the executing agency to revisit the entire bidding process. Thus, possible nepotism in the allocation of consultancy/construction envisaged for any project is also a reason for project delays leading to the payment of interest on loans without being able to utilise these loans.
The ideal situation would be for various ministries seeking foreign loans for their development projects to first assess the absorption capacity through meaningful consultations with the Ministry of Finance. While all project loans are signed in the presence of a senior staff member of the Economic Affairs Division, which is under the administrative control of the Ministry of Finance, yet their input into the project documents is limited and the overarching objective appears to be to facilitate access to as much foreign lending as possible. This approach needs to change and one would hope that a more realistic strategy, based on our resource constraints, be adopted in acquiring loans.