ADB stalls $300m loan tranche over delayed reforms

Money was to be used to provide cushion to SBP’s forex reserves and meet budget financing needs

ISLAMABAD: Pakistan’s foreign exchange reserves are likely to come under more strain in the coming months as the Asian Development Bank (ADB) has delayed the approval of a third loan tranche worth $300 million for budget financing after the government put energy sector reforms on the backburner.

The loan tranche is critical for the finance ministry as official foreign currency reserves have started depleting. In the last one month, forex reserves held by the State Bank of Pakistan have come down to $18.36 billion – a net reduction of $722 million. The loan proceeds would have been used to provide a cushion to the central bank’s foreign currency reserves besides meeting budget financing needs.



The ADB was supposed to approve the Sustainable Energy Sector Reforms sub-programme-III before the end of December, said sources in the finance ministry. The third tranche was part of a five-year $1.6-billion package the ADB had approved to make the country’s energy sector sustainable and self-reliant. The government has already received $800 million in two equal tranches in 2014 and 2015.

Sources said that due to non-implementation on most of the agreed prior actions, the ADB may not approve the loan in the near future. The finance ministry is the executing agency while the agreed actions have to be taken by the Ministry of Water and Power, Ministry of Petroleum and Natural Resources and the National Electric Power Regulatory Authority (Nepra).

Lack of coordination in policy formulation and implementation by the ministries and agencies remain a risk to these actions. After the expiry of the three-year $6.2-billion International Monetary Fund programme, the government’s focus has shifted away from the energy sector reforms agenda. It has also started taking populist decisions, which carry huge economic implications for the country.

Sources said that an ADB mission recently completed its visit to Pakistan to review progress on actions the country had agreed to take before the board of directors of the Manila-based lending agency and approve the next tranche.

The ADB had set 14 prior actions for the third loan tranche. These had to be completed by July 2016 to qualify for the loan of $300 million, according to ADB documents. Among the key conditions were approval of a multi-year tariff determination for two power distribution companies and reducing the flow of overdue payables of the energy sector to Rs92 billion. Both of these actions could not be completed, sources revealed.



Last month, the government rolled over the Rs136.5 billion loan it had obtained to pay off the circular debt. It suggests the power sector was not self-reliant even after the ADB and the World Bank collectively gave $2 billion in loans for power sector reforms in the past three years.

According to other conditions, the Private Power Infrastructure Board (PPIB) would update procedures for the 2002 IPP policy to ensure consistency with the least cost generation plan for competitive and unsolicited bids from IPPs for new capacity.

The government was also supposed to approve a restructuring plan for the midstream and downstream gas sector, which it could not do, said sources. The Ministry of Petroleum and Natural Resources was supposed to notify a revised 2012 Petroleum Policy to promote additional gas production.

Nepra was tasked to approve market rules to allow generators to directly contract sales to bulk power consumers, covering market registration, balancing operations, settlement and billing among market participants and offshore areas.

One of the targets under the second loan was to help Pakistan with short-term stabilisation measures and start the long-term restructuring for a sustainable power sector. This target could not be achieved.

However, the government claims that during the past three years it has improved the sector’s performance. There are now clear policies on tariffs and subsidies that are targeted at low-income customers. The line losses have been reduced and collection rate of Discos have improved.

Yet it could not address the circular debt that stood at Rs662 billion by the end of June 2016 including Rs335 billion parked in a holding company.

ADB Country Director Werner Liepach was unavailable for comment. A senior official of the finance ministry said that the December 2016 deadline for approval of the loan would be missed due to delay in taking prior actions by other government ministries.

Published in The Express Tribune, December 11^th, 2016.