ISLAMABAD: Asian Development Bank (ADB) on Monday signed an agreement with Pakistan to provide a $1.5 billion loan for budgetary support and help flood-related rehabilitation and reconstruction activities.

The loan agreement was signed by ADB’s Country Director Yong Ye and Secretary of Economic Affairs Division (EAD) Kazim Niaz. Prime Minister Shehbaz Sharif, Finance Minister Ishaq Dar, EAD Minister Ayaz Sadiq and ADB’s Director General for Central & West Asia Region Eugene Zhukov witnessed the ceremony.

The loan, provided under ADB’s Building Resilience with Active Countercyclical Expenditures (BRACE) Programme, will help fund the government’s $2.3bn countercyclical development expenditure programme designed to cushion the impacts of external shocks, including the Russian invasion of Ukraine.

The $1.5bn loan is aimed to provide social protection, promote food security, and support employment for people amid devastating floods and global supply chain disruptions. The approved loan would be disbursed next week and is expected to help build the foreign exchange reserves and rein in the rupee’s depreciation.

Pakistan’s total foreign exchange reserves declined to $13.25bn as of Oct 14 which included SBP’s holdings of $7.597bn, equivalent to about five weeks of controlled imports.

Mr Shehbaz thanked the ADB’s management and board of directors for swiftly processing and approving the loan to help the government fight devastations caused by recent floods. The prime minister said the international stakeholders like the European Union, the World Bank, ADB and the United Nations had estimated a $30bn loss to the Pakistan economy under their post-disaster need assessment (PDNA) and hoped the ADB’s loan would help reduce Pakistan’s economic challenges and minimise the sufferings of the population affected by floods.

Mr Eugene Zhukov explained to the authorities the repurposing of an existing ADB portfolio to the tune of $475m for an emergency assistance loan for rehabilitation and reconstruction of the flood-affected areas in Sindh, Balochistan and Khyber Pakhtunkhwa.

The board of directors of Manila-based lending agency had approved on Friday the $1.5bn loan and facilitated the immediate signing of the agreement on the next working day i.e. Monday.

The $1.5bn BRACE support to Pakistan under countercyclical programmes was earlier planned for post-Covid recovery. The planning commission had expressed reservations over the interest rate but later gave in owing to challenging foreign exchange conditions.

The Planning Commission wanted this to be soft financing at around 2pc interest instead of ordinary capital resources (OCR) that attract about 3.15pc interest. This includes an interest rate of Secured Overnight Financing Rate (SOFR) topped with 0.75pc and a surcharge, finally working out at about 3.15pc. Normal SOFR is about 2.3pc. The programme is outside the normal financing programme of the ADB and is relatively softer in terms of conditionalities.

Mr Zhukov said Pakistan’s recovery from the COVID-19 pandemic had been impeded by external shocks leading to increased business costs and rising living expenses, thus affecting millions of Pakistanis, especially the poor and vulnerable. ADB’s program will help the government manage the impacts of high prices, increasing food insecurity, slowing business activity, and reducing income for vulnerable groups, many of whom are also reeling from the devastating floods, he said.

The ADB said in a statement that the financing will provide the fiscal space needed for the government to implement its countercyclical development expenditure package, which is designed to target the poorest families in Pakistan who are often disproportionately affected in times of crisis. The government’s support includes specific measures to promote gender empowerment and climate change adaptation, which have become even more important in light of the recent floods.

Published in Dawn, October 25th, 2022