ISLAMABAD: The Asian Development Bank (ADB) on Friday approved $1.3 billion in loans for Pakistan for emergency budgetary support, chiefly through a relatively expensive crisis response facility.
The Manila-based lending agency announced that its board of directors had approved two loan programmes to help Pakistan build foreign exchange reserves viewed as critically low at present. The quick-disbursing loans would be available to Pakistan next week.
The loans include a $1bn Special Policy-Based Loan (SPBL) typically meant for emergency situations and involves about 4 per cent interest rate as it is a relatively short-term loan for seven years and charged at London-InterBank Offered Rate (Libor) plus 2pc. This is the first time Pakistan is availing ADB’s emergency loan for budget support.
Another $300 million loan for energy sector reforms for 20 years and five years grace period will be available to Islamabad at 2pc interest.
The two loans are in addition to $10.368bn obtained by the current government during the period between Aug 18, 2018 and Sept 30, 2019 from various institutions and governments, according to a written statement by Minister for Economic Affairs Hammad Azhar to National Assembly on Wednesday.
The two loans approved by the ADB would “meet the government’s emergency financing needs to prevent significant adverse social and economic impacts and lay the foundations for a return to balanced growth,” said ADB’s Director General for Central and West Asia Werner Liepach.
The SPBL is used to address external and internal payments crisis by providing large-scale support as part of an international rescue effort, including the International Monetary Fund (IMF) and the World Bank. “The special characteristics of crisis-related lending, particularly its unanticipated character and exceptional scale, and the associated credit risk require adequate risk-bearing capacity at the side of ADB to back up such lending,” according to ADB’s website.
Another dimension that would justify ADB intervention is when the crisis has significant structural dimensions and is likely to have significant negative social impact. To avail itself of assistance under an SPBL, a developing member country must be regular ordinary capital resources.
The lending agency said “quick dispersing SPBL was part of a comprehensive multi-donor economic reform programme led by the IMF to stabilise Pakistan’s economy after a major deterioration in its fiscal and financial position in mid-2018 caused growth to slump and threatened progress in alleviating poverty.
The ADB’s financing was approved after the government implemented a series of IMF-supported reforms and actions to improve its current account deficit, strengthen its revenue base and protect the poor against the social impact of the economic crisis.
Economic challenges
The ADB said Pakistan was facing significant economic challenges on the back of a large balance of payments gap and critically low foreign exchange reserves together with weak and unbalanced growth. While the country’s economy has a history of boom and bust economic cycles, it reached a tipping point in 2018 after foreign investment shrank sharply in an uncertain political and global economic environment and the ongoing poor performance of state-owned enterprises caused public debt to reach unsustainable levels.
In July, the IMF approved a three-year $6bn Extended Fund Facility (EFF) to finance the government’s economic reform programme that aims to put Pakistan’s economy on the path of sustainable and inclusive growth. The EFF is expected to catalyse at least $38bn in financing from Pakistan’s development partners. ADB has committed to provide a total of $2.1bn in policy-based lending during fiscal year 2019–2020 to support the reform programme.
The ADB explained that it also approved another $300m policy-based loan that will help the government address financial sustainability, governance, and energy infrastructure policy constraints in the Pakistan’s energy sector.
This will support the first of three sub-programmes totalling $1bn under the Energy Sector Reforms and Financial Sustainability Programme, a key component of a comprehensive IMF-led multi-donor economic reform programme.
“The cash shortfall across the power supply chain in Pakistan, also known as circular debt, has shot up to more than $10bn and is a longstanding chronic issue ailing the country’s power sector,” said Mr Werner Liepach. A comprehensive and realistic Circular Debt Reduction Plan assisted by the ADB in close coordination with other lenders aims to drastically cut the new flows of circular debt and provide policy directions on addressing accumulated circular debt.
The ADB said Pakistan had made significant efforts in recent years to expand its electricity generation capacity and stabilise supply but was yet to overcome the challenge of inefficiencies, distortions, and uneven reform progress in the sector. These inefficiencies were estimated to have cost the country’s economy up to $18bn, or 6.5pc of gross domestic product, in 2015.
Published in Dawn, December 7th, 2019
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