ISLAMABAD: Japan has provided a concessional loan worth $43 million to Pakistan for energy sector reforms on Tuesday, encouraging Islamabad to tap cheap bilateral foreign loans instead of embarking upon expensive commercial borrowings.
The loan is part of the $2-billion package international lenders have offered to Pakistan to implement structural reforms.
The World Bank and the Asian Development Bank (ADB) have already disbursed $900 million under the second phase of reforms last year. They also disbursed the same amount in 2014.
The three lenders have developed a ‘reforms programme’ and set agreed policy targets in the energy sector to remove structural bottlenecks.
The $43 million loan will be utilised for budget financing, unlike project loans that are used for creating assets.
In recent years, successive governments have preferred to tap budgetary support to finance the budget, which is creating a debt sustainability issue for the country.
The notes for the $43 million loan were signed by Ambassador of Japan to Pakistan Hiroshi Inomata and the Economic Affairs Division Secretary Tariq Bajwa.
The loan has been given for a period of 30 years at a low interest rate of 0.1% plus London Inter-bank Offered Rates.
Japan’s Economic and Development Counselor Takashi Harada, while commenting on Pakistan’s debt sustainability said, “Instead of obtaining high interest rates on foreign non-conventional loans, Pakistan should focus on cheap bilateral loans.”
A recent report by Moody’s – the international credit rating agency – stated that Pakistan’s debt sustainability had weakened due to expensive Eurobond borrowings.
Due to growing reliance on short-term loans, Pakistan’s external debt maturity worsened to 9.4 years in 2015 compared to 10.5 years in 2014, according to the Debt Policy Statement of 2015-16 released by Ministry of Finance.
“Pakistan is largely meeting the targets set under the reforms package, “stated the Japanese embassy officials, defending the decision of granting programme loans.
“Japan is satisfied with government of Pakistan’s direction to make the energy sector efficient,” said Harada.
Targets set by three lenders
“The first year energy sector targets have largely been met, while structural issues including improving recovery of electricity bills and reducing line losses would take a longer time,” said Japanese Embassy Senior Programme Officer Imran Ahmad.
The three international lenders had attached prior conditions related to the determination of multi-year electricity tariffs: to make power distribution companies attractive for privatisation and submitting the ‘Energy Efficiency and Conservation Bill’ to parliament. Another important condition was separation of the ‘Central Power Purchasing Agency’ (CPPA) from National Transmission and Dispatch Company (NTDC).
“The CPPA has been separated and is fully functional,” stated the Japanese embassy.
“The government of Japan expects the energy sector reforms to contribute to the economic stability of Pakistan as it is the highest priority of the Government of Pakistan (GoP) to resolve the energy issues”, said Ambassador Hiroshi Inomata, adding that the reforms would unleash the huge economic potential of Pakistan.
“The government of Japan intends to continue providing necessary assistance to Pakistan in the energy sector, while closely monitoring the progress of the reforms in coordination with other development partners,” he said after the signing ceremony.
An official handout of the Japanese embassy stated that the $43 million loan was also expected to contribute to an efficient production of electricity and energy conservation to mitigate the emission of greenhouse gases from the energy sector.
“The government of Japan will cooperate with the GOP for a fair and effective international framework in which all countries will participate to achieve the below 2 Celsius? objective, it added.
The Japanese Prime Minister Shinzo Abe has recently pledged to provide 1.3 trillion yen of public and private climate finance in 2020 to assist developing countries including Pakistan at COP 21 in Paris.
Published in The Express Tribune, February 3rd, 2016.