Provincial governments’ overdraft limits

EDITORIAL (September 16 2010): State Bank of Pakistan, besides shouldering a number of other responsibilities, is also a banker to the Federal and provincial governments. In this capacity, it prescribes overdraft (OD) limits to these entities known as “Ways & Means” to overcome cash flow mismatch during a certain period of time.
According to a news item in the “Business Recorder” on 14th September, Federal government, on the request of provinces, has granted approval for the enhancement of their OD limits to meet their current expenditures, in case of non-availability of funds. OD, it may be mentioned, is a limit upto which an account holder could borrow from a bank if there are no funds in its account. The case is predicated on the argument that provinces are entitled to the enhanced facility because of the 50 percent increase in salaries of the government employees announced in the FY11 budgets.
It is reported that all the four provinces, ie Punjab, Sindh, KP and Balochistan, have asked to increase their present OD limits from Rs 26.9 billion, Rs 9.9 billion, Rs 5.5 billion and Rs 4.5 billion to Rs 37.2 billion, Rs 15.00 billion, Rs 10.1 billion and Rs 7.1 billion respectively. The State Bank is expected to sign the new arrangement with the provinces after proper approval of the central government is conveyed to it.

Formal approval of the Federal government or its advice to the central bank on the above lines, in our view, would be both ill-timed and against the spirit of the State Bank of Pakistan (Amendment) Act 1997 which states very explicitly that the Central Board of SBP will “determine and enforce, in addition to the overall expansion of liquidity, the limit of credit to be extended by the Bank to the Federal government, provincial governments and other agencies of the Federal and provincial governments for all purposes, it being understood that the governments will meet their additional credit requirements directly from commercial banks through market based auctioning system to be conducted by the Bank”.

It is very clear from this clause of the Act that it would not only be improper for the Federal government to ask the SBP to raise OD limits of the provincial governments but it too is dependent on the Central Board of the SBP for any adjustment in its borrowing limit. There is some provision for the revision in borrowing limits of the governments in the clause pertaining to the Monetary and Fiscal Policies Co-ordination Board but the reconsideration of limits is subject to certain conditions and Governor, SBP is an important member of this Board.
Therefore, determination of OD limits is almost exclusively the domain of the SBP and such an authority/autonomy was deliberately made a part of the revised Act to empower it to formulate and monitor monetary and credit policy of the country to ensure monetary stability. As such, Federal government is not supposed to play a major role in this particular field.
However, the issue of higher OD limits could be resolved if the Board of SBP is convinced about the desirability of such a step after taking into account all the relevant factors like the pressing needs of the provincial governments and the current SBA with the IMF. Even in that case the State Bank needs to act in accordance with the exigency of the situation. Unfortunately, inflation rate in the country at present is around 13 percent and could accentuate further in the coming months due to a variety of reasons.
Increase in provincial governments’ spending encouraged by such a step would accelerate inflationary impulses in the economy and undermine efforts to promote monetary stability. In our view, provincial governments, on the other hand, should be asked, rather forcefully, to depend on their own resources and live within their means, especially after the recent NFC Award and the 18th Amendment.
It should be clearly understood that there has been a marked shift in political and financial powers from Islamabad to the provinces. The chief ministers now need to hold meetings of provincial finance commissions to distribute onward the provincial pie to district level. Education, health, irrigation and local projects need to be financed at the third tier of government. Lahore, Karachi, Peshawar and Quetta need to devolve powers downwards for efficient delivery mechanism evolved in true spirit.
In case they want to increase their spending on certain projects or raise current expenditures, higher financing needs should be met by mobilising additional resources from agricultural income tax or other revenue generation measures to maintain proper financial discipline in the country which is a must in the current environment. The new Governor of the SBP is definitely aware of all the relevant issues and, hopefully, would act in a prudent fashion to discharge his responsibility to maintain stability in the value of the rupee – Brecorder