Pakistan on Tuesday got $300 million loan from the Asian Development Bank for budget financing and building of reserves that have already slipped below $16 billion.
The global lender approved $300 million loan to further develop Pakistan’s capital markets, promote private investment in the country and help to mobilise domestic resources to finance sustainable growth, according to a statement by the ADB.
Pakistan’s Economic Affairs Minister Omar Ayub Khan was “grateful” to the ADB for approving $300 million loan. The loan will facilitate budgetary support, said Khan.
Like its predecessor, the Pakistan Tehreek-e-Insaf government ran the country by taking highly expensive foreign loans instead of relying on non-debt creating inflows to increase foreign exchange reserves.
The budgetary support loans are taken in the name of reforms to be undertaken in various sectors- a job that needs administrative will and skill, not foreign money.
Pakistan has secured the budget support loan at a crucial time, as its bailout talks with the International Monetary Fund hang in balance.
The ADB has based the $300 million support on the sixth review instead of basing it on the outcome of ongoing talks.
Pakistan’s Executive Director in ADB played an important role in ensuring unanimous approval of the loan by the ADB board.
The country’s reserves decreased to $15.8 billion by the end of the last week, which are largely the result of expensive foreign loans.
Omar Ayub said that the ADB loan programme aims to support demand and supply measures to broaden and deepen the financial system in Pakistan with strong legal and regulatory framework.
It was the second tranche under the capital market reforms after the ADB approved the first sub-programme in 2020.
The second tranche aims to catalyse the demand of institutional investors and increase the range of alternative financial instruments such as derivatives and commodity futures that are available to investors, said the ADB.
“For several years, ADB has been Pakistan’s lead development partner in supporting the evolution of its capital markets,” said ADB Director General for Central and West Asia Yevgeniy Zhukov. “By making the country’s capital markets more robust and strengthening government debt management, this new programme will also help mobilise more domestic resources which support the government’s efforts to finance sustainable growth and respond effectively to crises, he added.
Pakistan’s financial sector is dominated by banks and this lack of diversification increases the risk of the country not being able to withstand financial shocks and periods of uncertainty, according to the Manila-based lender.
Moreover, the Pakistan Stock Exchange lacks depth in terms of the number of investors which access it and the number of companies raising capital, while Pakistan’s bond market is almost completely dominated by government borrowing.
The ADB’s $300 million programme supports policy actions that will strengthen market stability and attract investor capital to Pakistan. These include structural reforms within the Securities and Exchange Commission of Pakistan that will improve governance and regulatory capacity.
It supports measures that will strengthen the government debt market and enhance market surveillance systems that facilitate information exchange. The programme also promotes an enabling environment to expedite access to financing for growth of companies and state-owned enterprises.
These reforms will help mobilise financial resources for productive investment, especially by the private sector, and help facilitate economic growth by developing the bond and equity capital markets, said ADB Economist Sana Masood.
This will help reduce the cost of financial intermediation and help stabilize systemic vulnerabilities in the bank-dominated finance system, she added.
Published in The Express Tribune, March 23rd, 2022.
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