Pakistan and the Asian Development Bank (ADB) have signed six loan agreements worth $1.2 billion, with one-third of it to be disbursed as budget financing, reopening choked financing pipelines after reaching a deal with the International Monetary Fund (IMF).

The loan agreements were signed by the Economic Affairs Division (EAD) and the local office of the ADB on Friday. A spokesperson of the EAD confirmed to The Express Tribune that $1.2 billion in loan agreements with the ADB have been inked.

Of the $1.2 billion, ADB will provide $400 million in budget support under two different deals, said the officials.

Budget financing has remained suspended for a longer time due to strained relations between Pakistan and the IMF, impacting lending programmes of two other multilateral creditors. After reaching a staff-level agreement last month, the IMF has now set January 11th as the date for approval of the $700 million tranche by its board.

design: mohsin alam

The ADB is expected to disburse a $300 million loan under the so-called Domestic Resource Mobilisation programme this week. Another $100 million in budget support is to be disbursed under the Women Financial Inclusion programme this week subject to fulfilling some procedural requirements. The budget support lending would help push the central bank’s reserves close to $7.5 billion.

Official inflows have remained low during the first five months of this fiscal year, standing only at $6.4 billion or a quarter of the annual financing needs. The rollovers of the $3 billion debt by Saudi Arabia are over and above these disbursements.

The ADB has approved these loans during the past few days, but the agreements were signed three days ago. The Manila-based lending agency signed these agreements only after declaring Pakistan’s debt sustainable – a position that is contrary to what Finance Minister Dr Shamshad Akhtar has taken. The minister said a few days ago that Pakistan’s public debt has become unsustainable.

The ADB stated that Pakistan’s public and external debt is projected to remain sustainable in the baseline scenario underpinned by the firm implementation of prudent macroeconomic policies over the medium term.

“The debt sustainability analysis also confirmed Pakistan’s debt sustainability under the impacts of multiple crises from 2020 to 2023 and after factoring in the additional borrowings,” it added.

Read ADB keeps growth forecast at 1.9%

It further stated in the project documents that large gross financing needs pose a high risk to medium-term debt sustainability, but decisive implementation of reform policies is expected to ensure continued access to adequate bilateral and multilateral financing.

The Manila-based lending agency said that this fiscal year’s budget targets an underlying primary surplus of 0.4% of GDP, a consolidation of 1.4% of GDP during the year.

The government’s FY2024 budget consolidation is based on strong revenue effort and containing energy subsidies.

The ADB also signed a $250 million agreement for the strengthening of the power transmission sector project, $102 million for the Punjab Workforce Readiness project, $83 million for the Khyber-Pakhtunkhwa Food Security project, and $250 million for the Sindh Secondary Education project.

The ADB documents stated that the current IMF programme was “critical for Pakistan to address multifaceted fiscal consolidation challenges that will help achieve fiscal and debt sustainability, unlock large external financing needs during the political transition, and provide a newly elected government with sufficient flexibility to shape the medium-term reform strategy.”

The ADB underlined that during the current fiscal year, the budget deficit is estimated to be 7.5% of GDP, and the government plans to finance the deficit through the issuance of treasury bills, bonds, and official development assistance.

Pakistan has taken a $300 million loan to strengthen the tax administration and increase collection – a task that does not need any foreign borrowing.

The $300 million loan will have a 15-year term, including a grace period of three years; an interest rate determined in accordance with ADB’s Flexible Loan Product; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the loan agreement, according to the ADB documents.

The Flexible Loan Product is a market-based floating rate lending instrument, and at current market prices, it would cost Pakistan over 6% interest – a cost that is almost three times higher than the concessional lending by the World Bank and the ADB.

The 15-year tenor of the ADB loan is also relatively shorter than its previous financing to Pakistan.

Published in The Express Tribune, December 20th, 2023.

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