Donors stop loans over lack of tax, power sector reforms

Shahbaz Rana June 11, 2010

ISLAMABAD: Multilateral donors have temporarily stopped over $1.5 billion loans, which were in the pipeline, as the government failed to deliver on promises of tax and power sector reforms, say officials.

A senior official of the Economic Affairs Division confirmed to The Express Tribune that the Asian Development Bank (ADB) has for the time being refused to attend signing ceremonies of five projects worth $1.12 billion. These projects were at a much advanced stage and the signing of agreements was expected before the end of this month.

The World Bank too has halted the release of Poverty Reduction Support Credit worth $300 million. With that, Japan’s co-financing grant of $100 million has also been stopped, as Tokyo has linked the amount, committed during the Tokyo conference in 2008, to the WB’s poverty reduction loan.

The hiccup in the external assistance programme may compound the government’s problems, which has already drawn the ire of the International Monetary Fund (IMF) after abandoning an agreed plan to impose the Value Added Tax from July 1.

A senior official of the finance ministry said more than two-thirds of the $1.52 billion loans were expected to cover budget financing and any delay in their release would leave no option for the government but to borrow at least Rs90 billion from the State Bank.

“This will breach the IMF’s performance criteria of net zero borrowing from the central bank at the end of each quarter and for that the government will have to seek a waiver from the IMF’s Executive Board during the next economic review,” he added.

The government has already borrowed over Rs170 billion from the SBP in violation of the IMF conditions.

The EAD official said the Asian Development Bank (ADB) has put in place three conditions for the release of $450 million in budgetary support grant under the Accelerated Economic Transformation Programme. The bank wants the government to give a financing plan to get rid of the circular debt, ensure adequate funds for the National Highway Authority projects so that the ADB money can be secured and return unutilised loans given for six projects.

The official said the ADB has also stopped the signing of agreements for the Sindh Growth and Rural Revitalisation project worth $120 million, the Punjab Millennium Development Goals project worth $150 million, the Second Capital Market Reforms Programme worth $200 million and the Public-Private Partnership project worth $200 million.

The official said the finance ministry was preparing a financing plan, which would be shared soon with the ADB.

In the energy summit held in Islamabad in May, the government had planned to arrange Rs66 billion to reduce the inter-corporate debt, which has again ballooned to Rs130 billion. In the next fiscal year, the government will pay Rs40 billion in interest on Term Finance Certificates (TFCs), which were issued by the Water and Power Development Authority (Wapda) to retire the debt.

The EAD official said the ADB has asked the government to provide three-year funding commitment for the National Highway Authority, as the donor has reservations that financial constraints and land acquisition issues may negatively impact its funding for the projects.

“The government has allocated Rs44.6 billion for the NHA for the next fiscal year and the finance ministry has assured the ADB that it will provide the required amount in the next two financial years as well,” he added.

The ADB has also asked the government to return the amount, which it has not spent. The official said the government this year paid billions of rupees to the multilateral donors on account of commitment charges on the unspent amount.

The World Bank has enforced the conditions of VAT and increase in electricity tariffs from April 1.

Published in the Express Tribune, June 11th, 2010.


Atif | 11 years ago | Reply Nothing in hand
Meekal Ahmed | 11 years ago | Reply Well, it seems like at least two waivers will be needed: the non-implementation of VAT by July 1, and non-observance of end-of-quarter zero net borrowing from the central bank. I can't see the former being waived unless we have a really convincing explanation.
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