The National Natural Resources and Fiscal Commission (NNRFC) has recommended the limit of internal borrowing that the three tiers of government can mobilize in the next fiscal year.
As per the recommendation, the federal government will be able to raise internal debt of five percent of the country's gross domestic product (GDP) while the provincial and local levels will be able to raise loans no more than 12 percent of the total revenue from their internal resources and financial transfers.
"The government can raise internal debt for the fiscal year 2025/26 not more than five percent of the estimated GDP after analyzing the country's macroeconomic situation, the estimates of revenue and expenditure, and the convenience of the market," the Commission stated in its recommendation.
It has suggested that the government should invest only in the capital generating sector by raising internal debt.
The Commission has recommended raising internal loans only for projects with an appropriate internal rate of return or net current value through cost-benefit analysis carried out on the basis of national policies and plans, and for projects of national pride, the transformative projects and the projects accorded first priority under the medium-term expenditure structure.
However, the provincial and local levels will be able to raise loans only after completing the prescribed legal procedures.
Earlier, without taking permission from the federal government, the provinces used to present internal debt as a source by bringing deficit budget. However, the NNRFC has asked the provincial governments to show internal debt as a source only after completing the process.
"The provincial governments will be able to raise internal debt in the fiscal year 2025/26 without increasing to 12 percent of the sum of the revenue sharing amount received from the government and the revenue amount received from the internal sources of the provincial government, if the structural and procedural arrangements of internal debt mobilization are completed," according to the NNRFC recommendation.
The provinces are also required to invest the amount raised as an internal loan in capital-creating projects and the pride projects.
An arrangement has been made by which not only the provincial governments but local levels could also raise internal debt.
The local levels could raise a debt of 12 percent of the sum of the revenue distribution to be received from the federal and provincial governments and the revenue amount received from their internal resources.
The Finance Commission has recommended the government to take loans only to invest in projects that can provide long-term benefits and contribute to capital formation.
The Commission shared that debt should not be raised for spending on current expenses. "The internal loan should be allocated for the projects that create employment opportunity, give long-term benefit and contribute capital formation. Spending on current and administrative expenses should be strictly prohibited", added the Commission.
The loan should be invested on profit-oriented projects having an internal rate of return higher than capital investment.
As per the recommendation of the Commission, the internal debt could be mobilized in the projects that have been prepared for production growth, employment creation, income growth and capital formation.
Likewise, the Commission suggested that as per clause 14 of the Intergovernmental Finance Management Act, 2074, the provincial and local governments should mention internal loans as sources in the budget only after receiving the government's permission.
However, the provinces have been mentioning internal loans as the budget sources. (RSS)
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