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CWA # 642, 10 January 2022

Pakistan Reader
Pakistan and the Asian Development Bank

  Ankit Singh

Approximately one-tenth of Pakistan's external public debt servicing was paid to the ADB.

In the news: One-tenth of Pakistan’s external debt goes to the ADB
According to the annual report on Foreign Economic Assistance for the financial year 2019-20 published by Pakistan’s Ministry of Economic Affairs, Pakistan paid approximately one-tenth of its external public debt servicing to ADB. This was higher than the debt servicing to World Bank (WB) and China separately. The government paid USD 10.4 billion during FY 2019-20 on debt servicing of the external public loan. This means ADB received almost one billion from Pakistan. 

Brief background
Pakistan’s agreements with the ADB are policy-based loans, loan agreements, financing, and results-based lending programme. These include the following domains: energy, water resource and social infrastructure. Similar agreements have been signed with Islamic Development Bank but in a fraction of a billion. Besides, trends from the annual reports over the last decade indicate that ADB received the proportional loan repayments earliest over other financing partners.

The most significant projects and financial arrangements have been denominated majorly in USD and SDR (special drawing rights). Japanese currency once had a comfortable share of Pakistan disbursement of ADB’s external loans. But in the last decade, USD and SDR have dominated all denominations in financial arrangement with institutions, both multilateral or commercial. 

According to the annual report of 2019-20, 70 per cent of the external loans were committed at fixed interest rates while the rest were committed at floating interest rates making Pakistan’s current account deficit volatile to market-led investment and fluctuations. This explains the insistence of the Pakistani government for the continuation of extended fund facility (EFF) worth USD one billion from the International Monetary Fund (IMF) for the current financial year. After the IMF decides to consider the continuation of EFF, floodgates of other external budget support are likely to open, ADB founded on principles of the World Bank in Asia, has initiated the continuation of the periodical financial extension to Pakistan. While the latest ADB deal will create confidence among investors as large banks like ADB are bringing in money, the deal may attract only an oblique of investors. The lens of geo-economic space of cooperation among Pakistan’s development and strategic partners instead of geopolitical rivalry is preferred by current leaders. The net effect of external loan managements through diverse sources will face its test and resilience value over time in cross-hairs of financial affairs with multilateral institutions and major bilateral partners when one project on tax expansion funded by multilateral institutions supplements commodity financing project financed by a bilateral partner. The issue and success of the cooperation are still based on the outcome of the projects and not on the prospects of the agreements.

For the financial year 2020-21, the PTI government has contracted approximately 50 per cent more loans (net new external borrowing stood at USD 15 billion compared to the new loans for 2019, which stood at USD 10 billion) for a development agenda, 45 per cent of such new financial agreements were signed with west backed multilateral institutions, with World Bank emerging as highest development partner to the financial basket of Pakistan followed by ADB which accounted for 20 per cent of new financial agreements. However, an equal amount of external loans of that of the World Bank were contracted from foreign commercial banks at commercial rates. This shake-up and more expensive financial commitments are laden with risks and remain to be blossom soon.

Outside the ADB: Pakistan’s other external loan agreements for 2021-22

Pakistan has signed the following agreements, outside those with the ADB:

  • The State Bank of Pakistan has signed a financial agreement worth USD 3 billion with Saudi Fund for Development and almost USD one billion deferred oil payments agreement between respective governments. 
  • The International Islamic Trade Finance Corporation (ITFC), a subsidiary of the Islamic Development Bank (IDB) and Pakistan signed a loan agreement on a commercial bank rate worth USD 761 million in the domain of commodity financing, especially oil and gas. 
  • A project-based loan agreement was signed with ADB worth USD 252 million to construct Mohmand Dam and anti-Covid vaccine support. 
  • Besides project-specific and commodity financing loans, budgetary support loans also constitute a major chunk of the external debt profile of Pakistan. World Bank has been the main contributor in this domain. 

Pakistan’s external debt and the ADB
External debt is utilised as a tool for enabling finance development interventions, generating economic activity, allocating resources without feeling fiscal tightening and augmentation of financial resources. For example, the USD 15 billion of external loans financed this year have been mostly utilised for strengthening foreign exchange reserve and for financing imports like oil and gas. The capital expenditure in infrastructure development is also partially employed through external loans to keep the development projects at the right pace and to generate a positive perception for development and trading partners about the prospect of capital expenditure in Pakistan. In contrast, the revenue generated is then used for servicing external loans. Therefore, the external loans are like the confidence builder about Pakistan’s economy and become a priority to build a prospective Pakistani image. The ADB as an autonomous institution is involved in supporting short term development goals, and there exists a scope in extending financial support in the domain of finance development interventions, especially in a post-pandemic time when masses mirror themselves on screens. Pakistan is a young nation in terms of population composition, and it can contribute its ingenuity to the region and the world. Even though being shadow WB, ADB has its geo-specificity in terms of the composition of member states, and there may as well be a domain in which Pakistan is utilising ADB’s financial arrangements for its march forward.

References

*Note: The note was first published in http://www.pakistanreader.org/

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