Government to cut defence expenditure to 3.6 percent of GDP

ISLAMABAD (November 16 2002) : In case of any unforeseen developments, which could threaten the fiscal deficit target, the government plans to reduce non-priority expenditures, protecting the budgeted increase in poverty reduction (I-PRSP) expenditures, says government-Letter of Intent (LoI) released by IMF on Thursday.

One main risk would be a prolongation or escalation of tension on the eastern border that could constrain our ability to achieve the fiscal targets. Barring such developments, the government intends to reduce the share of defence expenditure in relation to GDP to about 3.6 percent, from 4.0 percent in 2001/02.

Another risk is that for various reasons, KESC and/or Wapda may not achieve the planned efficiency gains, such as the envisaged reduction in theft and technical losses or improvements in bill collection from Fata. For example, additional budgetary outlays of up to Rs 5 billion would be required if KESC were not privatised during this fiscal year. Furthermore, as set out in the June, 2002, MEFP, an excess in external budgetary cash grants plus capital grants over programmed levels may be used for additional expenditure on I-PRSP categories, for up to 0.5 percent of GDP.

It also says that maintaining ADBP as a publicly-owned corporation carries risks, notably that it would prove difficult to turnaround the performance of the staff kept on payroll, or that eventually its lending and staffing will again become dominated by non-commercial considerations, which in the past has led to its current insolvency.

The government believes, however, that given ADBP's critical role in the rural sector, the immediate liquidation of ADBP would have had unacceptable social costs. As other rural finance institutions are being developed under the ADBP program, we will, after two years, review the possibility of privatising ADBP or, if needed, consider its liquidation.

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