hyber Pakhtunkhwa is currently facing unparalleled challenges. A complex lie of circumstances is putting immense strain on its fiscal health. The province’s share of the federal divisible pool, 14.62 percent under the latest National Finance Commission award, augmented by an additional 1 percent on account of the security situation, comes to around Rs 856 billion for the fiscal year 2023-24.

Instead of nearly Rs 356 billion allocated for the first five months, the provincial government received Rs 295 billion, leaving a deficit of around Rs 62 billion. It also received Rs 7 billion out of the net hydel profit instead of Rs 30 billion so that the arrears now stand at R 78 billion.

The recently merged districts (formerly Federally Administered Tribal Areas) receive no separate funds. Rs 66 billion a year is earmarked for current expenditures. However, the annual requirement for salaries, pensions and other expenses is around Rs 152 billion.

For the first five months of the year 2023-24 the administration has received Rs 33 billion against a requirement of Rs 63 billion.

On the development front, the province has received Rs 103 billion under the Accelerated Implementation Programme in the last four years instead of Rs 400 billion, resulting in a deficit of Rs 297 billion. For the financial year 2023-24, the federal government has committed Rs 31 billion for the AIP but no funds have been transferred over the last five months.

Against a commitment for a Rs 26 billion grant for the merged areas in 2023-24, the received amount in the last five months has been only Rs 9 billion. The implications of not releasing the amounts committed for development in the merged area extend beyond local concerns. The development in these areas can have a positive impact on security, not just in the region.

The provincial government has responded to the situation by making significant cuts in development expenditure in settled districts and by spending out of the salary funds in the first five months of the year 2023-24. However, a crisis looms large for the upcoming months.

This deficit poses considerable challenges for sustaining essential services, executing development projects and meeting the financial obligations of the merged districts. The repercussions of this shortfall are expected to impact economic growth in the KP for the fiscal year 2023-24. Meanwhile, a high policy rate is hindering investment.

The provincial government needs to urgently chart a course for recovery and sustained economic growth. One of the primary concerns contributing to the multifaceted challenges is the marked reduction in development expenditure.

In the first five months of the fiscal year 2023-24, the development expenditure has amounted to a mere Rs 44 billion. This amount includes the provincial ADP, AIP, MA ADP and foreign-funded projects. There is thus a substantial decline compared to the five months average expenditure of Rs 90 billion in 2021-22 and Rs 55 billion in 2022-23. The downward trajectory in development spending is particularly alarming, given its strong correlation with economic growth.

The implications of not releasing the committed amounts for development in the merged area extend beyond local concerns. Development in the merged districts can have a positive impact on security and not just in this region.

In the fiscal year 2021-22, when annual development expenditure peaked at Rs 217 billion, the policy rate was relatively low, around 8 percent, and there was a stable political government.

This contributed to a growth rate of 4.32 percent. However, the fiscal year 2022-23 was marked by a reduction in annual development spending to Rs 130 billion, a policy rate raise to 15 percent and the introduction of a caretaker setup. This resulted in a significant dip in the growth rate which came down to 1.75 percent.

The current fiscal year has been even more challenging, with the lowest development expenditure in recent years, a 23 percent policy rate and the installation of a new caretaker government. This confluence of these factors is poised to result in an economic growth rate likely lower than the previous year, underscoring the critical importance of a balanced approach to development, fiscal policies and political stability.

Still, timely actions can pave the way for an economic rejuvenation:

It has been proposed that the KP’s share of the federal funds be increased from 14.62 percent to 19.64 percent. Such an adjustment is pivotal given the 5.7 million increase in population and 36 percent in area through the merged districts.

The net hydel profit releases hold the key to the provincial government’s financial resilience. The release of these funds can help bridge the deficit. At the same time, addressing the growing deficit in development funding under the AIP is imperative.

The imposition of the so-called windfall levy has also exacerbated the financial challenges confronting the KP.

A swift resolution of the issues is crucial to establish a comprehensive and effective recovery strategy, possibly by adding Rs 15 billion receivables to the provincial receipts. It is essential that these issues need to be taken up with the
federal government at the earliest.

The own-source provincial revenue currently stands at approximately Rs 60 billion. To enhance fiscal sustainability, measures must be implemented to boost this revenue. A valuable lesson can be drawn from the Punjab’s success in increasing both tax and non-tax revenue. The Punjab has raised its revenue to over Rs 500 billion.

Timely disbursement of committed resources is crucial for uplift in historically marginalised regions. Organising a donors’ conference to mobilise external support for KP’s development can help. By showcasing its strategic priorities, the KP government can secure funding for projects aligning with its development agenda.

Lastly, leveraging Public Private Partnership can drive sustained economic growth. KP’s track record in executing mega projects on a PPP mode positions it well to attract private investment and foster a conducive environment for key development initiatives. Together, these measures can set the stage for a better growth trajectory, overcoming fiscal constraints and fostering sustainable development in the province.

The writer is the principal staff officer to the additional chief secretary P&DD and PPP advisor in the PPP Unit of P&DD, Khyber Pakhtunkhwa