Islamic Development Bank pledges $3 billion loan

Cash-starved government resorts to short-term loans after Western lenders halt assistance.

ISLAMABAD:

Muslim states on Tuesday pledged to give $3 billion to cash-starved Pakistan, as a virtual halt of concessional foreign assistance by Western lenders has pushed Islamabad to obtain expensive short-term loans.

The Islamic Development Bank (IDB) – a Jeddah-based donor club – agreed to provide $3 billion under Member Country Partnership Strategy 2012-15, announced the IDB Director Mohammad Jamal on Tuesday. Jamal said the terms of the loans would be decided later, but informed “most of the lending will be commercial”.

It is the largest commitment made by the IDB during 35 years of partnership with Islamabad. During the last 35 years, Pakistan obtained a total of $7.5 billion loans from the costly lender due to comparatively harsh conditions. The IDB’s commercial lending rates are usually four per cent plus the London Interbank Offered Rate. Moreover, IDB’s lending is for the shorter term, usually for one to two years.

The World Bank (WB) and the Asian Development Bank (ADB) offer a mix of concessional and expensive loans, as even their more expensive loans are two to three per cent cheaper than the IDB’s commercial loans. Additionally, WB and ADB offer loans for a period of 25 to 38 years, which provides sufficient time to return the money in inallments.

WB and ADB have stalled the budgetary support and reduced project loans due to Islamabad’s inability to implement tax and power sector reforms on time. Suspension of the $11.3 billion IMF programme also contributed to the lower-than-targeted assistance.

According to data provided by the State Bank of Pakistan (SBP), during the first seven months of the current fiscal year, international donors provided project loans worth $471 million, which were $94 million less than the corresponding period of the preceding year. Programme loans during the period under review also drastically dropped to $623 million from last year’s figure of $1.8 billion. Out of $623 million, a major chunk of $450 million had been given by the International Monetary Fund to off-set last summer’s flood impact.

IDB will not provide budgetary support, rather the $3 billion portfolio will be allocated for development projects, explained Jamal. IDB has linked lending with implementation of Poverty Reduction Strategy Paper II and the forthcoming new growth strategy, he added.

IDB’s lending linkage with new growth strategy seems ironic, as the new growth strategy talks about getting rid of foreign-aid driven growth model and emphasises upon market reforms and good governance.

The IDB Director said that focus of $3 billion lending will be in the infrastructure, energy, agriculture, education and health sectors. “Bearing in mind the immense needs of Pakistan, the primary focus will be on more sustainable and cheap sources of electricity generation,” he added.

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