ADB loan to prop up reserves

The Asian Development Bank (ADB) on Friday approved a $300 million loan to supplement Pakistan’s foreign exchange reserves that are being built through borrowing, taking its total policy lending to $900 million in the past five months.

The ADB has approved the $300 million policy-based loan to help promote macroeconomic stability in Pakistan by facilitating improved trade competitiveness and export diversification, according to a statement issued by the Manila-based lending agency after its board meeting.

Although the loan has been sanctioned in the name of trade reforms, the money will be used to support the foreign exchange reserves that stand at around $13.4 billion and are not the result of non-debt creating inflows.

Lately, there has been an upsurge in remittances, which have grown 26.5% since July 2020 and a continuation of the trend will be critical to lessen the burden of foreign loans for building the reserves.

The $300 million loan is part of the $800 million budgetary support programme and the regional lender has already disbursed the first tranche in August last year.

The first loan tranche of $500 million has also been used to supplement the foreign exchange reserves. Despite the $500 million loan, there was no improvement in the country’s exports that remained flat, even in the pre-coronavirus situation.

The ADB has so far approved $900 million in loans for Pakistan in the current fiscal year while its project lending has been severely squeezed.

In first four months of current fiscal year, the ADB disbursed $665 million to Pakistan and $490 million or nearly threefourth was policy lending. In total, Pakistan received $3.2 billion in loans during the July-October period of current fiscal year and out of that, project financing - money received to create assets - amounted to less than $400 million or nearly 13% of the borrowing, according to the economic affairs ministry.

“While Covid-19 hit Pakistan at a critical point in its macroeconomic recovery, the government’s ongoing efforts to ensure stability have started showing encouraging results this fiscal year,” said ADB Principal Public Management Specialist Hiranya Mukhopadhyay.

He stated that the ADB’s programme would support these efforts and help Pakistan to improve its export competitiveness - now more important than ever given the impact of the pandemic.

Pakistan’s exports during July-October remained at $7.3 billion, down 10.3% or $842 million compared with the same period of last fiscal year, according to the State Bank of Pakistan (SBP). The ADB said its loan programme would help Pakistan recover its current account deficit in a sustained manner and continue to facilitate export diversification.

The regional lender said the loan programme would “introduce important tariff- and tax-related policy reforms to help improve Pakistan’s international competitiveness and further strengthen key institutions, including accreditation bodies, Export-Import Bank of Pakistan and Pakistan Single Window”.

The lender said under the first tranche of $500 million, the ADB helped the government usher in key reforms, including reducing or abolishing tariffs and ad hoc duties on a large number of raw materials and intermediate goods. Several steps were also taken to introduce e-commerce, strengthen key institutions involved in facilitating trade, and enhance the export certification process, it added.

Since fiscal year 2004, Pakistan has registered a rise-and-fall pattern in export growth, reflecting underperformance of its export industry and a long-term decline in export competitiveness.

This is compounded by a lost export growth momentum due to Covid-19, which has reduced high-income countries’ demand for manufacturing goods and disrupted the supply of raw material.

The ADB is coordinating its efforts with other development partners and donors while the programme complements the International Monetary Fund (IMF)-led reform initiatives by helping to improve competitiveness, which will help build robust foreign exchange reserves.

The ADB had also set a condition to pass the National Single Window (NSW) Act, which the government could not meet. However, it has now assured the lender that the bill will be passed by the National Assembly before the end of December.

To qualify for the loan, the government has already approved the national tariff policy and has also removed the requirement for importers to confirm that all imported machinery and capital goods are not made locally to get customs duty exemption.

Several raw materials and intermediate inputs have also been exempted from customs duty, like cotton yarn, cotton fabrics, sewing thread of manmade filaments and synthetic textile material.

The government takes credit for these measures but actually these have been implemented under the conditions imposed by the ADB.