GOVERNMENT OF THE PUNJAB

PUNJAB DEVELOPMENT
FORUM 2005

OVERVIEW OF PUNJAB’S FINANCES

April 18, 2005

1
 THE PROBLEM WITH PUNJAB’S
FINANCES

 Overwhelming reliance on Federal

Transfers
 Low Provincial Resource Mobilization
 Budget structure dominated by
Establishment Costs, Debt Repayment,
Pensions and Subsidies
 Low level of spending on Public Services

2
 VICIOUS CYCLE OF PROVINCIAL
FINANCES AND SERVICE DELIVERY
FISCAL SQUEEZE DUE TO LOW REVENUES, HIGH
DEBT SERVICE AND ESTABLISHMENT COSTS,
PENSIONS AND SUBSIDIES

LOW LEVEL OF
LOW POTENTIAL TAX
SPENDING ON PUBLIC
BASE
SERVICES

INADEQUATE PROVISION
OF SERVICES TO THE
PUBLIC
3
 FINANCIAL AND FISCAL REFORM
AGENDA

Objective

Creating fiscal space for sustainable

investments in pro-poor public service
delivery

4
 KEY BUDGETARY MAGNITUDES
Description Percentage of Total Current
Revenue
Actuals Targeted
1999 to 2003 2008
Federal Transfers 82% 76%
Provincial Own Revenues 18% 24%
Percentage of Total
Expenditure
Current Expenditure 84% 62%
Development Expenditure 16% 33%
Expenditure on Premature Nil 5%
Debt Retirement,
Establishment of Pension
Fund etc. 5
 KEY BUDGETARY MAGNITUDES
(Contd…)

Percentage of total
Current Expenditure
Description Actuals Targeted
1999 to 2003 2008
Establishment 45% 41%
Expenditure
Debt Repayment 18% 4.5%
Pensions 7% 7%*
Subsidies 3% 1%**
TOTAL 73% 53.5%
* Non-accrual of impact of Pension Fund
** Targeted Subsidies only 6
 KEY BUDGETARY MAGNITUDES
(Contd…)

Percentage of total
Current Expenditure
Description Actuals Targeted
1999 to 2003 2008
O&M costs 6% 10%
Non-Salary 9% 15%
recurrent
expenditures
TOTAL 15% 25%

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How would the targets be
achieved?

8
 PUNJAB PURSUING A FINANCIAL
AND FISCAL REFORM AGENDA

The adoption of a Medium Term Budgetary

Framework is the primary instrument of
Punjab’s financial and fiscal reform agenda

9
 PUNJAB’S MTBF – 2006-2008
RESOURCE ESTIMATION

The estimation of resources is based on

the following principles:
• Improved revenues through better
resource mobilization, and
• Costsavings through better public
expenditure management

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 ASSUMPTIONS UNDERLYING –
IMPROVED REVENUE BASE
1. Sixth NFC Award would be finalized prior to FY
05-06
2. The federal tax to GDP ratio of at least 14.3%
would be maintained
3. Resultant growth in Divisible Pool Taxes would
be at least 13.2% per annum.
4. Straight Transfers would continue to grow at
least at the existing rate of 7.5%.
5. Net proceeds of hydel profits from Ghazi Brotha
would be transferred to the Punjab by WAPDA /
Federal government. 11
ASSUMPTIONS – IMPROVED REVENUE
BASE (Contd..)

6. Additional federal transfers would continue at

least at the existing benchmark of Rs. 5 billion
per annum.
7. Provincial tax receipts would grow at least 12%
per annum.
8. Provincial Non-tax receipts would grow by at
least 11% per annum.
9. The potential of Agriculture income tax would be
tapped.
10. Move shall be made towards the replacement of
motor vehicle tax by levy on fuel consumption for
development of communications and transport
infrastructure.
12
ASSUMPTIONS – IMPROVED REVENUE
BASE (Contd..)

11. The net of general sales tax on services shall be

extended to other services.
12. Local governments would generate own
resources at a benchmark of Rs. 10 billion in FY
05-06, inclusive of property tax
13. The growth rate of own receipts of local
government would be at least 10% per annum.
14. Additional revenues would be available through
privatization of state properties including
encroached lands at a minimum rate of Rs. 3
billion per annum.
15. Cash / social dividends from corporatized
entities would be available in the MTBF period at
a minimum of Rs. 1 billion per annum. 13
ASSUMPTIONS – IMPROVED REVENUE
BASE (Contd..)

16. Foreign assistance in the nature of budgetary

support would continue to flow at the existing
rate of US$ 200 million per annum (Rs. 11.4
billion p.a.) through PRMP and PESRP.
17. The Punjab Development Fund would provide a
net resource of at least Rs. 2 billion p.a. in the
MTBF period.
18. The Federal Government would allow the
Punjab, on an annual basis for the MTBF period,
to obtain Ways and Means advances, equivalent
to the principal amount of debt earmarked for
retirement. 14
 ASSUMPTIONS – BETTER PUBLIC
EXPENDITURE MANAGEMENT
1. The federal government would continue to
accept early retirement of high cost cash
development loans out of the proceeds of PRMP
and PESRP @ of at least Rs. 11.4 billion per
annum in the MTBF period.
2. Sustained and growing fiscal space would be
available on account of early debt retirement as
follows:
(Rs. in billion)
05-06 06-07 07-08
3.688 5.193 4.94

15
ASSUMPTIONS – BETTER PUBLIC
EXPENDITURE MANAGEMENT (Contd..)

3. The gap between expenditures and receipts of

state owned enterprises would continue to be
narrowed.
4. Full recovery for water supply and sanitation
services would be in place by the last year of
MTBF through a phased programme.
5. Alternate modes of service delivery like BOT,
public private partnerships would be extended to
infrastructure and social sector development.
6. The policy of phasing out subsidies that do not
explicitly target the poor would be continued.
16
ASSUMPTIONS – BETTER PUBLIC
EXPENDITURE MANAGEMENT (Contd..)

7. Contingent liabilities would be contained.

8. The policy of phased withdrawal from
commercial and other non-core activities would
continue.
9. Establishment costs would be kept in check and
non-salary expenditures consistently improved.

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 SUMMARY OF TOTAL RESOURCES
(Rs. in million)
Heads 2004-05 2005-06 2006-07 2007-08 ACGR
B.E
1 Federal 144,223 172,913 195,260 220,567 15.2
Transfers
2 Provincial Tax 20,125 22,660 27,734 31,284 15.8
Receipts
3 Provincial Non 15,674 17,711 20,014 22,615 13.0
Tax Receipts
4 Local Govt. 0 10,000 11,000 12,100 34.3
Receipts
5 Punjab 0 1,500 2,500 3,500 51.8
Development
Fund
Total Current 180,022 224,784 256,508 290,067 16.0
Revenue

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 SUMMARY OF TOTAL RESOURCES Contd…

(Rs. in million)
FINANCING ITEMS
Heads 2004-05 B.E 2005-06 2006-07 2007-08 ACG
R
5 Net Capital - 5,582 0 0 7,346
Account
6 Net Public 2,100 2,111 2,088 2,022
Account
7 Foreign 8,785 9,614 10,575 11,633 9.8
Development
Assistance
Total 185,324 236,508 269,171 311,068 15.0
Resources
Total Current 97.1% 95.0% 95.3% 93.2%
Revenue / Total
Resources

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 MEDIUM TERM BUDGETARY FRAMEWORK 2006-08
PROPOSED TOTAL EXPENDITURE
(Rs. in million)
B. E. Budget Budget Budget AC
ITEM
2004-05 2005-06 2006-07 2007-08 GR
Current 141,884 154,570 168,334 184,195 9.64
Development 43,440 72,340 85,263 101,772 28.87
Financial Reform
Programme /
Debt Swaps,
----- 9,598 15,574 25,100 13.79
Pension Fund /
Capitalization of
GP Fund
Total Financial
Reform + ----- 81,938 100,837 126,873 25.23
Development
Total
185,324 236,508 269,171 311,068 15.03
Expenditure 20
 PUNJAB DEBT PROFILE 2004-08
PROJECTED
(Rs. in millions)
Heads 2004-05 2005-06 2006-07 2007-08
Domestic Loans (CDL + 68,490 58,525 48,428 38,209
SCARP + new public debt)
Foreign Loans 87,540 107,067 128,104 149,771
TOTAL DEBT 156,030 165,592 176,532 187,980
Debt Servicing (Interest) to 6.4% 5.0% 3.8% 2.9%
Total Expenditure
Debt Servicing to Current 9.4% 7.3% 5.7% 4.5%
Expenditures
Debt Servicing to Current 7.0% 5.2% 4.0% 3.1%
Revenue Receipts
Total Debt Stock as a 83.9% 73.7% 68.8% 64.8%
percentage of Total
Revenue 21
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