ADB to approve $2b financing
The exact size of the emergency loan will be determined after completion of Post Damage and Need Assessment report. photo: file
The Asian Development Bank (ADB) is set to approve approximately $2 billion in loans before the end of December. The inflow, along with the new finance minister backing the policy to retain non-tariff barriers to discourage imports, will help Pakistan sustain its foreign exchange reserves at the current levels.
The ADB is expected to approve a $1.5 billion loan on October 21st, followed by another emergency assistance loan in the range of $400 million to $500 million, which is scheduled to be approved on December 13th, according to the people privy to these discussions.
These loans are expected to support the current foreign exchange reserves, critically low at $8 billion, amid the government’s move to tighten the noose around currency market speculators to strengthen the rupee.
However, until conditions in the exchange market normalise, it is unlikely that the government will ease restrictions on the import of automobiles, machinery and equipment, disclosed sources.
Meanwhile, Finance Minister Ishaq Dar on Wednesday chaired the first meeting of a committee that the prime minister set up to resolve the problems being faced by the importers and exporters due to the restrictions imposed by the central bank.
The meeting discussed modalities to facilitate the business community regarding imports and enhancing exports, according to a statement issued by the ministry of finance.
The finance minister, however, did not agree to lift restrictions until normalcy returns to the exchange market and pressure on the external sector eases, the officials said.
Earlier, these restrictions were placed to reduce the high imports that raised the alarm of the country’s risking default.
Meanwhile, the rupee has recovered 6.6% of its value in the past 10 days, while imports have also reduced by 21% during the first quarter of the current fiscal year.
In another instance on Wednesday, Dar met with a delegation of the ADB headed by its Country Director Yong Ye at the finance division. ADB’s Deputy Country Director Asad Aleem was also present in the meeting.
The ADB country director informed the finance minister that ADB will provide flood relief support to Pakistan to the tune of $2.3 billion to $2.5 billion, including US$ 1.5 billion for Building Resilience with Active Countercyclical Expenditures (BRACE). The BRACE is a part of ADB’s Countercyclical Support Facility, which does not imply conditions that are part of the traditional lending portfolio.
It was learnt that the BRACE programme will be placed before the ADB Board for approval on October 21st. In addition to this, the ADB board will also take up the matter of an emergency assistance loan of $400 million to $500 million for approval on December 13.
It is worth noting that Pakistan sought the $1.5 billion loan to cope with the worsening macroeconomic crisis compounded by the Russian invasion of Ukraine and devastating floods. ADB will provide a $1.25 billion loan out of its ordinary capital resource at an interest rate of Secured Overnight Financing Rate (SOFR) plus 0.75%, and a surcharge.
The current SOFR cost is 2.28%, which will take the total interest rate to over 3%, one of the most expensive rates measured by the standards of the ADB and the World Bank.
Furthermore, the $1.25 billion loan is being secured for a period of seven years, which is also 18 years shorter than the standard loan tenure of the ADB. While another loan of $250 million is being obtained at a rate of 2% for a period of 25 years.
Subsequently, the Planning Commission had objected to obtaining the $1.25 billion loan facility at such a high rate. “The rate is essentially of a commercial loan. Since Pakistan is already facing an economic crisis, therefore, lenders may negotiate for a concessional loan,” showed the official documents.
The exact size of the emergency loan will be determined once the Post Damage and Need Assessment Report (PDNA) is completed. While the tentative date for the report to be ready was October 15th, the report is now expected by October 20th due to a delay in the provision of some data identified by the government.
So far, the international lenders including the World Bank, ADB, the European Union and the United Nations are undertaking the PDNA report, none have started quantifying the damages and losses yet.
In addition to the $2 billion fresh lending, the ADB is also working to change the scope of projects in Khyber-Pakhtunkhwa and Sindh to divert funds toward the floods rehabilitation. These projects are in the infrastructure and hydropower sectors.
Published in The Express Tribune, October 6th, 2022.
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