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.
According to the officials, ADB will fund $400 million of the $1.2 billion through two separate agreements.
Due to tense ties between Pakistan and the IMF, budget financing has been stopped for an extended period, affecting the lending programs of two other multilateral creditors. The IMF has now established January 11th as the date for its board to approve the $700 million tranche, following a staff-level agreement last month.
This week, the ADB is anticipated to provide a $300 million loan as part of the so-called Domestic Resource Mobilisation initiative. This week, an additional $100 million in budget support will be distributed under the Women Financial Inclusion initiative, if certain procedural requirements are met. The central bank’s reserves would approach $7.5 billion thanks to the budget support loan.
The First Five Months of the Current Fiscal Year
During the first five months of the current fiscal year, official inflows have remained low, amounting to just $6.4 billion, or 25% of the annual funding needs. These payments are in addition to the rollovers of Saudi Arabia’s $3 billion debt.
Although the agreements were made three days earlier, the ADB has sanctioned these loans in the last few days. The financing agency located in Manila only signed these agreements after determining that Pakistan’s debt was manageable, a stance that contrasts with that of Finance Minister Dr. Shamshad Akhtar. A few days ago, the minister declared that Pakistan’s national debt could no longer be maintained.
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.
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 efforts 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.
ADB Documents Stated that the Current IMF Program
The ADB documents stated that the current IMF program 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 per ADB’s Flexible Loan Product; a commitment charge of 0.15% per year; and such other terms and conditions outlined 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.