Is ADB making Pakistan pay for dissenting?

Officials call budget cut a ploy to penalise Pakistan for refusing to accept flood reconstruction reprioritised loans.

ISLAMABAD: The Manila-based Asian Development Bank (ADB) has decided to make a deep cut in the Accelerating Economic Transformation Programme, reducing it between $600 million and $1.4 billion, and delay the release of its third tranche indefinitely.

Officials in the finance ministry said that they think this is a ploy to penalise the country for refusing to accept reprioritised loans for flood-related reconstruction.

Sources said that the programme, meant to provide budgetary support for Pakistan, was originally designed to help the country overcome challenges in the areas of agriculture, energy and trade through budget financing.

In September 2008, when the World Bank had stopped funding and the United States blocked the disbursement of the Coalition Support Fund, pushing Pakistan into the IMF lap, the ADB approved a four-year $1.8 billion programme. Later, the ADB had agreed to increase its size to $2.3 billion.

Officials said that the first sign of the impact of Pakistan’s decision was when ADB indefinitely postponed the next tranche’s approval. The donor agency wanted to take out $1.5 billion from the ongoing loan portfolio.

Pakistan has asked donors that it will accept only new loans for reconstruction activities.

The World Bank had also offered $997.5 million out of that approximately $400 million via a loan diversion strategy.  The ADB has already released $1 billion under the AETP in two equal tranches. The third installment of $500 million was due to be released before June this year, but was delayed because of ongoing talks on power sector reforms between Pakistan, the ADB and the WB.

The ADB decision would disturb the government’s budget financing plan, depriving of it at least Rs43 billion. The government, it is learnt, is expecting Rs812 billion budget deficit this year in the post-flood scenario and is also facing an uphill task of borrowing at least this much money from domestic and international sources.

The ADB then decided to approve the third tranche on August 27 but again postponed it. It has indicated that it will approve the release of the third tranche in 2011 but gave no exact date.

According to an earlier agreed plan, the donor agency was supposed to release the fourth and fifth tranches of $400 each in 2011 and 2012, respectively. The new strategy shows $500 million in 2011, $100 million in 2012 and only $150 million in 2013, slashing the programme by as much as $1.7 billion.

An official of the Economic Affairs Division, which primarily deals with donors, said apparently the ADB was demanding a business plan to address inter-corporate debt which has grown to Rs426 billion. The government has parked Rs301 billion debt in a holding company and is paying Rs40 billion annually on account of interest on this amount.

“The business plan is partially ready and partially implemented by increasing electricity tariffs on a monthly basis and the ADB knows this,” said a finance ministry official, who is looking after power sector affairs. He said it was simply not possible to prepare or implement the plan immediately.

The government is preparing a three-tier strategy to address power sector issues, envisaging addressing issues like inter-corporate debt known as circular debt, full recovery of electricity generation cost and future prospects of enhancing the efficiency of power generation and distribution companies.

According to the business plan, the government will increase 16 per cent tariff (2 per cent monthly) which will fetch Rs31 billion till June next year.

Published in The Express Tribune, November 27^th, 2010.