Pakistan to get $600m ADB loans to bolster FX reserves

Two loans, each amounting to $300 million, set for approval in next 10 days

ISLAMABAD: Pakistan will secure loans worth $600 million in the next 10 days from the Asian Development Bank (ADB) to cushion its foreign currency reserves which started depleting again on the back of heavy debt repayments.

The Manila-based lending agency would approve two policy loans, each amounting to $300 million, under the second and third tranches of the Public Sector Enterprises (PSEs) Reforms and Sustainable Energy Sector Reforms, respectively, said sources in the finance ministry.

The first loan will be approved on Thursday for the energy sector followed by another on June 22 for the PSE reforms, they said.

Another $100 million loan, sanctioned by the French Development Agency (AFD), is also pegged with the ADB’s energy sector loan but Paris will disburse the money sometime in the new fiscal year.



With fresh injection of $600 million, ADB’s total loans to Pakistan would surge to over $1.5 billion during the outgoing fiscal year – $500 million more than the government’s budgetary estimates.

It seems that the ADB is throwing in good money after bad money.

Despite receiving foreign loans worth billions of dollars over the past four years from the ADB and the World Bank, Pakistan had been unable to improve the financial conditions of its enterprises.

Despite taking these loans, the government failed to address issues causing the accumulation of circular debt.

The circular debt again crossed the Rs400 billion mark and Independent Power Producers (IPPs) are once again threatening to stop power generation because of non-clearance of dues.



The government was also unable to privatise any of its loss-making enterprises and the Pakistan Railways showed any signs of improvement whose books showed a reduction in losses. However, its finances still remain in the red.

The $300 million PSE reforms had originally been planned for the next fiscal year (2017-18). On the request of the finance ministry, the ADB advanced the calendar and the loan will now be disbursed this month, the sources said.

Unlike project lending that is disbursed as work on scheme progresses, policy loans are paid upfront in one tranche helping the government build up its foreign currency reserves besides diversifying budget financing.

Instead of building up foreign currency reserves through exports, the Finance Ministry resorted to increasing its reserves by borrowing from traditional partners and from foreign commercial banks.



The government has already borrowed $2 billion from China for balance of payment support.

As of June 2, the central bank’s own gross official reserves stood at $15.7 billion – $1.2 billion lower than a week ago because of foreign loans repayments.

Pakistan’s external debt servicing – including interest payments – consumed $3.9 billion during the first nine months of the outgoing fiscal year, according to the Economic Survey of Pakistan (2016-17).

The amount equalled almost one-fourth of its total export receipts, and over one-tenth of the country’s total foreign exchange earnings, creating doubts about debt sustainability.



The World Bank also raised this issue in its latest report.

To deflect criticism on debt, the government changed the definition of total public debt in June last year by amending the Fiscal Responsibility and Debt Limitation Act, 2005 through the Finance Bill of 2016.

Finance Ministry’s viewpoint:

Amid growing criticism on debt situation in the local press as well as by international financial institutions, the Finance Ministry issued a rejoinder on Monday in response to a story based on the World Bank’s latest report.

“There is limited pressure from external debt repayments in the medium term,” claimed the Finance Ministry.

It insisted that external debt repayment obligations for Pakistan would not exceed more than an average of $4.3 billion per annum until 2022 based on outstanding external public debt at the end of March this year.



Keeping in view the country’s track record, repayments should not raise any concern, said the ministry.

It said that in the past, Pakistan had successfully met its higher repayment obligations.

Furthermore, it anticipated that the average yearly external inflows would be around $6.7 billion until 2022 against expected annual average repayment obligations of $4.3 billion.