ADB okays $300m loan for reforms
Central govt debt, excluding its liabilities, increased to Rs35.6tr by the end of July 2020, reported the State Bank of Pakistan. PHOTO: FILE
The Pakistan Tehreek-e-Insaf government on Monday secured another $300 million in budget support loan from the Asian Development Bank (ADB) for building foreign exchange reserves as exports stood low to meet the country’s external financing needs.
The ADB board of directors approved a $300 million policy-based loan to help strengthen Pakistan’s finance sector by supporting measures to develop competitive capital markets and encourage private sector investment in the country, according to a statement issued by the local office of the lender.
With the fresh loan approval, the ADB’s lending in the name of capital market reforms has increased to over $1 billion in the past 23 years. The tranche of $300 million is part of a $600 million deal and the next tranche of an equal amount will be approved next year.
However, the functions that Pakistan will perform in return for getting the loan do not require any foreign economic assistance. In return for giving the money, the ADB has included conditions that strictly do not relate to capital markets but serve the interest of foreign investors.
In the first two months of current fiscal year, the Pakistan Tehreek-e-Insaf (PTI) government has already received $2.2 billion in gross foreign loans and 94% of those loans were for budget support and building the foreign exchange reserves. Out of the $2.2 billion, project financing - money received to create assets - amounted to only $138 million or 6% of the borrowing, according to the economic affairs ministry.
Loan conditions
Contrary to public statements of Prime Minister Imran Khan, the PTI government is adding an unsustainable debt burden and is signing deals that will not help to repay these loans.
The $300 million loan has been secured for increasing Pakistan’s stock market capitalisation to at least 40% of gross domestic product (GDP) from the current 30%, according to the ADB documents.
Similarly, by December 2022, corporate bond issuance as a percentage of GDP has to be increased to at least 7% from the current 2.2%. By December 2022, the number of listed companies in the equity market has to be increased to 700 from the current 558 listed companies, according to the ADB documents. All these targets do not need foreign loans, instead the government has to create an enabling environment for doing business.
Sources in the Securities and Exchange Commission of Pakistan (SECP) told The Express Tribune that a recent listing at the stock market was not transparent and rules were bent under pressure.
According to another condition, the PTI government will have to approve the SECP’s revised organogram by March 2022. Another condition says a national policy for pension reforms and an insurance sector development strategy have to be approved by March 2022.
The ADB was also told that the withholding capital gains tax on foreign investors was removed. The government will also have to set up an investor protection fund by March 2022. Similarly, the Debt Management Office has to be established by March 2022.
Loan preparation documents underlined that Pakistan’s financial markets currently did not play a significant role in financial intermediation and resource mobilisation.
With 558 listed companies and $58 billion worth of market capitalisation, the Pakistan Stock Exchange (PSX) is significantly below regional peers on a per capita basis and as a percentage of GDP.
Also, many listed companies have a minimal free float of shares since most shares are held by sponsors including the government.
“Accounting and auditing standards of listed companies are also unreliable and lack facts for informed investment decisions,” according to the documents.
The corporate governance structure of listed companies is not sufficiently transparent and lacks proper checks and balances.
It was noted in programme documents that the role of government as the dominant borrower from the banking sector had restricted the space for private sector credit and essential long-term financing for infrastructure projects, which were a prerequisite for supporting growth.
Public debt mounts
The central government’s debt, excluding its liabilities, increased to Rs35.6 trillion by the end of July 2020, reported the State Bank of Pakistan (SBP) on Monday.
The Rs35.6 trillion central government debt is exclusive of liabilities that the government indirectly owes to creditors. The PTI government added Rs450 billion to the debt in the first month (July) of current fiscal year. The Rs450 billion increase in debt in July alone was more than the overall budget deficit for the July-August 2020 period.
When Imran Khan became the prime minister, the central government’s debt was close to Rs24.2 trillion. In February last year, the PM vowed to bring the public debt below Rs20 trillion.
The central government debt comprises long and short-term domestic and external debt.
The SBP report showed that the central government’s total domestic debt increased from Rs23.3 trillion in June to Rs23.4 trillion in July, a net addition of Rs110 billion.
The report showed that a major increase in the federal government debt was on account of long-term debt, which swelled from Rs17.7 trillion to Rs18 trillion. There was an increase of Rs350 billion in the long-term debt.
The short-term domestic debt dropped from Rs5.6 trillion in June to Rs5.33 trillion in July due to the shift in borrowing to long-term instruments.
External debt of the central government increased from Rs11.8 trillion to Rs12.2 trillion by the end of July 2020, an addition of Rs339 billion.
Published in The Express Tribune, September 29th, 2020.
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