Fiscal arm-twisting: Government backs down after ADB threat

Lender says it will stop loan if govt transfers SECP’s surplus income to federal fund.

ISLAMABAD:

The Asian Development Bank (ADB) forced Pakistan at the eleventh hour to withdraw a budgetary proposal on the threat that a loan tranche of $200 million expected to be released by the end of June would be stopped, indicating the extent of influence international lending agencies enjoy in the country.

The ‘bare threat’ came just 24 hours before the National Assembly was scheduled to approve the federal budget, forcing economic managers to hold meetings late in the night to resolve the issue, revealed sources privy to the development.

The Manila-based lending agency objected to taking away surplus funds of the Securities and Exchange Commission of Pakistan (SECP) and depositing them in the federal consolidated fund. Sources said ADB argued that it would undermine the stock market regulator’s financial autonomy.

Bearing in mind the importance of $200 million (Rs17.2 billion) in narrowing down the budget deficit, the government surrendered the will of parliament to the lending agency. The government is striving to fill the yawning budget gap which is expected to remain between 5.9 and 6.2 per cent of total national income.

When the ADB resident mission was asked to comment as to why it took a measure which was “tantamount to undermining parliament’s sovereignty and what was the link between loan and surplus funds”, the agency’s spokesman Ismail Khan first asked to take the finance ministry’s version but later said “we have no comments”.

High-ranking finance ministry officials confirmed the reason for withdrawing the proposal, but were reluctant to speak on record due to sensitivity of the matter, as it may create further problems in getting additional loans.

None other than Finance Minister Dr Abdul Hafeez Shaikh stood up in the National Assembly and proposed to remove the relevant clause from the Finance Bill. In order to cover up the matter, the government also omitted other clauses that were inserted to get surplus funds from other regulatory bodies and deposit them in the federal consolidated fund.

Knowing well the implications of the loan stoppage, the finance minister was said to have contacted President Asif Ali Zardari to bail out the ministry, just a few hours before the NA session was about to approve the budget, sources said.

They said Zardari gave consent to withdrawal of the proposed amendment. SECP was one of four regulatory bodies whose income was proposed to be deposited in the consolidated fund. It was a unanimous proposal of the opposition and the government, initiated few months back by Senator Ishaq Dar at the Senate Standing Committee on Finance that was later on adopted by the government as well.

In 2007, ADB approved a $400 million commercial loan for the restructuring of Pakistan’s capital markets under a programme titled “Second Generation Capital Market Reforms”. The lending agency has already released $200 million but has been withholding the last equivalent tranche for a couple of years after the government failed to meet pre-conditions.

On its part, the government says it has already met all conditions when the Cabinet recently approved amendments to SECP laws and also took approval of the Council of Common Interests – the highest decision-making body between the federation and provinces.

“The 1969 Securities Ordinance has been frequently amended over time, but is still outdated in some major areas. Among its many weaknesses, it fails to provide SECP with sufficient investigative and enforcement powers,” reads the loan agreement between ADB and Pakistan.

Under a loan condition, the government is bound to sell shares of state-owned companies through domestic and international stock markets. The government has already started this process. It is also legally bound to introduce a law to strengthen overall regulatory governance.

Published in The Express Tribune, June 23^rd, 2011.