Identifier
Created
Classification
Origin
08ISLAMABAD3374
2008-10-27 03:01:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

BALOCHISTAN PROVINCE: FINANCIALLY DEPENDENT ON THE FEDERAL

Tags:  ECON EFIN EAID EIND ENGY EPET PREL PGOV PK 
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UNCLAS SECTION 01 OF 03 ISLAMABAD 003374 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAID EIND ENGY EPET PREL PGOV PK
SUBJECT: BALOCHISTAN PROVINCE: FINANCIALLY DEPENDENT ON THE FEDERAL
GOVERNMENT AND FACING INCREASED BUDGET SHORTFALLS

UNCLAS SECTION 01 OF 03 ISLAMABAD 003374

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAID EIND ENGY EPET PREL PGOV PK
SUBJECT: BALOCHISTAN PROVINCE: FINANCIALLY DEPENDENT ON THE FEDERAL
GOVERNMENT AND FACING INCREASED BUDGET SHORTFALLS


1. (U) Summary. As an underdeveloped region in Pakistan,
Balochistan is dependent on the federal government for 94 percent of
its budget and faces an estimated budget deficit of PKR 8.81 billion
(USD 112 million) for the current 2008-09 financial year. Despite
being the largest province in size geographically, Balochistan only
receives 5 percent in federal tax revenue. It also receives revenue
from the federal government in natural gas royalties, duties, and
surcharges (which combined have declined 32 percent from FY2006-07
to FY2007-08) and a minimal amount from tax revenue despite being
packed with natural resources and huge economic potential. As the
Government of Pakistan (GOP) realizes that an International Monetary
Fund (IMF) program may be inevitable for the economy to survive,
development funds and provincial budgets will likely be cut to meet
IMF conditionality. Since it is so reliant on the federal
government for revenue, Balochistan could be extremely vulnerable
when these cuts are made to meet the current balance of payment
crisis. End Summary.

--------------
ECONOMIC WOES FOR THE PROVINCE
--------------


2. (U) Balochistan has experienced a series of financial crises
throughout the last five years due to its heavy debt servicing
liability. The province heavily depends on federal government
financial support and does not receive any significant revenue yield
from taxes. Balochistan relies on the federal government for
approximately 94 percent of its budget. It has an estimated deficit
budget of PKR 71.19 billion (USD 901 million at 79 PKR to USD) for
the current 2008-09 financial year. The total income of the
province for FY 2008-09 is estimated at PKR 62.38 billion (USD 790
million) against total expenditures of PKR 71.19 billion (USD 901
million). Sources of revenue include income from the province's
natural resources which totaled PKR 9.746 billion (USD 123 million),

income from provincial tax collection which was PKR 3.47 billion
(USD 44 million) and income from federal grants and tax collection
estimated at PKR 48.05 billion (USD 608 million).


3. (SBU) Income from natural resources is divided into three
categories: royalties, surcharges, and excise duties. Royalties
correspond to the payment by the federal government for the use of
the natural gas. In FY 2007-08, royalties to Balochistan were PKR
2.68 billion (USD 34 million) up from PKR 2.24 billion (USD 28
million) in FY 2006-07. Surcharges represent the taxes on gas
consumption paid by users of natural gas. In FY 2007-08, surcharges
dropped to PKR 4.796 billion (USD 60 million) from PKR 10.99 billion
(USD 139 million) in FY 2006-07 (a 56 percent drop). Excise duties
are taxes levied on the production of natural gas. In FY 2007-08,
excise duties were PKR 2.27 billion (USD 29 million) up from PKR
1.13 billion (USD 14 million) in FY 2006-07. Year over year, income
from natural gas dropped from PKR 14.357 billion (USD 182 million)
in FY 2006-07 to PKR 9.746 billion (USD 123 million) in FY 2007-08.
This drop is attributed to lower natural gas production, which was
disrupted by law and order problems and supply transmission
problems.


4. (SBU) When planning for the new fiscal year which began July 1,
the Balochistan government sought financial help from the federal
government during its budget announcement in June 2008, as it did
not have financial resources for new development projects. On June
17, Prime Minister Yousuf Raza Gilani announced a PKR 6 billion (USD
76 million) grant for Balochistan from his special discretionary
funds, as well as directing the Oil Gas Development Company to pay
PKR 3 billion (USD 38 million) in outstanding debt to the
Balochistan government. On October 20, the federal government
announced that it would provide another PKR 3 billion (USD 38
million) in debt relief to the Balochistan provincial government
from unidentified federal funds.


5. (SBU) In September 2008, the State Bank of Pakistan (SBP) also
extended a financial package to mitigate the economic difficulties
of the Balochistan Government. The package aims to provide
breathing room by putting the provincial overdraft with the SBP into
a blocked account which would be zeroed out within a period of six
years through monthly deductions. In order to further aid the
Balochistan government, the SBP will enhance the existing limit of
the Ways and Means Advance to PKR 2 billion (USD 25 million) from
PKR 1.7 billion (USD 22 million). (Comment: The Ways and Means

ISLAMABAD 00003374 002 OF 003


Advance is a 4 percent interest loan advanced to a province by the
State Bank of Pakistan. End Comment.) The SBP Governor Dr.
Shamshad Akhtar, however, emphasized that the Balochistan government
would truly reap the benefits of the financial package if it imposed
strict financial discipline and more prudently managed its cash
inflows from other resources such as natural gas royalties and
surcharges. In response, the Balochistan government has imposed a
complete ban on the purchase of new vehicles and on attendance of
seminars in foreign countries. Other austerity measures enacted
include a ban on convening official meetings at hotels.


6. (SBU) However, the additional money allocated to Balochistan from
federal resources has already been consumed by additional
expenditures on law and order, a reduction in oil and natural gas
production, and higher pay and pension bills due to increased
salaries from the recent increase in Pakistan's minimum wage from
4,600 rupees to 6,000 rupees per month. These problems continue to
persist in the current fiscal year as nationalist militants,
demanding autonomy and local control over the province's resources,
have increased attacks on the gas pipelines. While the federal
government has the mandate to distribute, transmit and supply the
natural gas, the Balochistan government does not have enough
representation in the National Assembly or within the federal
government to induce more production, transmission and supply of
natural gas within the province.

--------------
FEDERAL BUDGET SHORTFALLS IMPACT PROVINCES
--------------


7. (SBU) The federal government aims to gradually increase the
allocated shares to provinces from federal tax revenues from 41
percent in FY2006-07 to 46 percent in 2010. The Punjab province
gets 50 percent of federal government tax revenue while Balochistan
receives only 5.22 percent. The Sindh province gets 34.85 percent
and the North West Frontier Province (NWFP) receives 9.93 percent of
federal tax revenues. The Pakistani "territories" of the Federally
Administered Tribal Areas (FATA),Azad Jammu and Kashmir (AJK) and
the Northern Areas are not allocated a share of the federal tax
revenues since only provinces receive allocations. These
"territories" however, are allocated income through the Public
Sector Development Program (PSDP). Azad Jammu and Kashmir has been
allocated PKR 11.99 billion (USD 152 million) under the PSDP for
FY2008-09 versus PKR 8.97 billion (USD 114 million) in FY2007-08,
the Northern Areas have been allocated PKR 5.61 billion (USD 71
million) FY2008-09 compared to PKR 4.5 billion (USD 57 million) last
year and FATA has been allocated PKR 8.6 billion (USD 109 million)
for FY2008-09 compared to PKR 7.5 billion (USD 95 million) in
FY2007-08.


8. (SBU) All of the provinces, except for Punjab, take issue over
the resource distribution formula used by the federal government,
which currently favors the provinces with larger population sizes.
The provinces of Sindh, Balochistan, and NWFP claim that resource
distribution should not be based on size of population solely, but
rather on a combination of factors including the degree of poverty
and tax contribution.

--------------
RICH IN RESOURCES BUT POOR AND UNDEVELOPED
--------------


9. (U) Balochistan is a resource and mineral rich province, though
most of its natural resources are undeveloped. It is the largest
province in terms of size of Pakistan with 44 percent (347,000 sq.
kms) of the land area but is the smallest in terms of population,
with only 5 percent of the population (8 million). The province,
which in general lacks sufficient water resources to exploit its
natural resource potential and to sustain its local economy, was hit
recently by severe drought.


10. (U) Balochistan is endowed with a large number of natural
resources, such as coal, gold, copper, silver, platinum, aluminum,
chromite, zinc, and uranium, which are to a great extent unexplored
and unutilized. The subsoil holds a substantial portion of
Pakistan's energy and mineral resources, accounting for 36 percent
of the country's total gas production. Balochistan has a 770
kilometer coastline, accounting for around 70 percent of Pakistan's

ISLAMABAD 00003374 003 OF 003


total, which could prove to be an important trade corridor in the
region by connecting China and the Central Asian republics to the
Arabian Sea. The province is relatively deprived with inadequate
health, education and employment facilities. It is predominantly
rural with almost 50 percent of the total population living below
the poverty line according to the Balochistan Poverty Reduction
Strategy Paper of November 2003.


11. (SBU) Comment. Balochistan's financial future is closely tied
with that of the federal government, leaving it extremely vulnerable
in this period of economic crisis. As the GOP inches closer towards
realization that an IMF program may be inevitable for the economy to
survive, development funds and provincial budgets will be cut. The
impact on the poor, particularly in the often overlooked Balochistan
province, will be potentially harsh as food insecurity and funding
shortfalls further reduce services which the provincial government
will not be able to provide with the current resources. End
Comment.

PATTERSON