Govt considers currency hedging

Proposal comes as govt seeks to reduce forex risk to foreign-funded projects

ISLAMABAD:

Finance and Revenue Minister Shaukat Tarin has floated the idea of seeking support of commercial banks and international finance institutions for hedging against risk arising in the wake of rupee depreciation.

The proposal came as the government wanted to reduce the foreign exchange risk to foreign-funded projects due to weakening of the rupee against the US dollar.

Tarin came up with the idea while chairing a meeting of the Executive Committee of National Economic Council (Ecnec), which met recently to consider the Punjab Arterial Roads Improvement Programme.

The meeting was told that sponsoring agency of the project should plan to reduce the foreign exchange risk to foreign-aided projects.

Committee chairman called for engaging commercial banks/ funds and international finance institutions to get their support and guidance for hedging against risk due to depreciation of the rupee.

The Ministry of Planning briefed Ecnec about the Punjab road improvement project, recalling that it was considered by the Central Development Working Party (CDWP) in its meeting held on November 8, 2021.

It recommended the project for Ecnec’s approval at the total cost of Rs129.94 billion ($773.20 million) including foreign aid of Rs115.78 billion ($688.92 million) with the condition of coming up with an approved tolling policy of the government of Punjab and details of annual operation and maintenance (O&M) budget and the expenditure over the past five years.

It approved a yardstick for the O&M budget along with projections for the next five years.

The government of Punjab confirmed compliance with the above CDWP decisions. The Ministry of Planning submitted some proposals for Ecnec’s consideration.

It recommended that the project should be placed for the consideration of Ecnec at the total cost of Rs129.94 billion ($773.20 million) including foreign aid of Rs115.78 billion ($688.92 million) with the directive that the government of Punjab would ensure implementation of the tolling policy/ framework approved by the Provincial Development Working Party.

The project would be financed to the tune of Rs14.16 billion from the government of Punjab’s own resources, Rs64.97 billion ($386.60 million) from the Asian Development Bank (ADB) and Rs50.81 billion ($302.32 million) from the Asian Infrastructure Investment Bank (AIIB), the ministry said.

It proposed that loan repayment should be the responsibility of the sponsoring agency (the government of Punjab).

All road rehabilitation projects funded through the development partners would only be processed if O&M expenditure was met through tolling fee/ revenue generation, the ministry recommended.

During discussion, the Ecnec chairman observed that establishing a mechanism for O&M expenditure after completion of the project would be very important.

It was emphasised that the sponsoring agency should establish the O&M mechanism upfront for all such projects to ensure subsequent maintenance work.

The creation of an O&M fund was also suggested to finance the estimated expenditure.

Ecnec considered a summary submitted by the Ministry of Planning titled “Punjab Arterial Roads Improvement Programme”. It approved the proposal that the Punjab government should create an asset management fund, wherein all toll collection would be deposited directly, and the fund should be used exclusively for O&M of roads.