Budgetary support: ADB assistance hinges on broader reforms

Bank offers $2.5b for development projects only over two years.

ISLAMABAD:

The Asian Development Bank, while unveiling a two-year $2.5 billion lending programme for around two dozen development projects, has indicated that a resumption of budgetary support for Pakistan will hinge on the country’s agreement with the International Monetary Fund on undertaking broader economic reforms.

In its two-year Country Operations Business Plan for 2013-14, the lending agency, based in Manila and the largest creditor for Pakistan, has also refrained from committing funds for the multi-billion dollar Diamer Bhasha Dam. Instead, it has indicated a technical assistance of $15 million only as part of a ‘standby’ portfolio, but this amount is “subject to a broader agreement and prerequisites”.

After initially placing two conditions for financing the dam, estimated to cost around $12 billion, the ADB has lately asked Pakistan to get a no-objection certificate from India, which is not being received well in government circles. Initially, the ADB called on Pakistan to acquire land and develop national consensus in a bid to avoid hurdles during construction work. However, when both the conditions were met, the ADB retreated from its commitment.



The bank has stopped short of promising budgetary support in its new programme, saying it will be contingent on a broader agreement on macroeconomic reforms with the IMF.

International creditors have stopped offering loans to Pakistan for financing the widening budget deficit in an attempt to pressurise the government to undertake serious reforms for reviving the economy.

In the absence of foreign assistance, the foreign exchange reserves, held by the State Bank of Pakistan, are dropping at a fast pace with hefty loan repayments to the IMF. The rupee, which is already feeling the pressure, is expected to shed more value by the end of this month as the country is set to pay an installment of over $500 million to the IMF on February 26, according to officials.

According to the new loan programme, the ADB will provide roughly $2.5 billion over two years. Of this amount, $1.1 billion is concessionary lending and $1.4 billion will be offered on commercial terms, say ADB documents. At the same time, the bank has made it clear that the concessionary lending will depend on Pakistan’s rating under the performance-based allocation system.

The ADB programme is aimed at supporting a number of initiatives, including poverty alleviation, good governance, urban development and targeted projects for women.

“Pakistan’s development finance requirements will exceed its own resources. Continued access to ADB funding will be contingent on the government’s sound economic management, prudent fiscal policies, consistent portfolio investment and successful project implementation,” the bank said.

The ADB will only extend financing for development projects in the areas of energy, communications and urban services development. It observes that the energy sector has policy and operational issues as well as unmet capital investment needs, which have become an increasing drain on public finances and economic growth. The bank will give $670 million in loans for addressing bottlenecks in the energy sector.

The ADB has also targeted infrastructure which has become an impediment in the way of development and competitiveness. It has indicated an assistance of $650 million for the construction of roads and has earmarked $435 million for financial sector reforms. For urban services, it is expected to loan $210 million over the next two years.

Published in The Express Tribune, February 21^st, 2013.

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