Loans or grants?

There seems to be a great deal of confusion about the terms of assistance committed by the donors at the international conference held in Islamabad on 19th November, 2005 for the relief and rehabilitation of earthquake victims. Of course, there is hardly any disagreement on that the total commitments were almost beyond expectations.
While Pakistan had asked for $5.2 billion, assistance pledged by multilateral financial institutions and bilateral donors amounted to $6.2 billion to bring back life to normalcy in the calamity-stricken areas.
Out of the initial pledges made ($5.8 billion), $1.9 billion were in the form of grants and $3.9 billion in soft loans. The two largest amounts, one billion dollars each, were offered by the World Bank and the Asian Development Bank.
While the grant and loan components of the total pledges appeared to be fairly obvious at the time of commitments, the eagerness of some of the government officials to give a more positive spin to the outcome of donors' conference has confounded the issue.
Talking to "Business Recorder" on 26th November, the Advisor to Finance Ministry, Ashfaq Khan claimed that 60 percent of donors' $4 billion soft loan pledges for rehabilitation and reconstruction at 0.5 percent service charges for 40 years, including 10 years grace period, would ultimately become grants.
He clarified that of the pledged amounts, about $2 billion were in cash and kind like food, medicines, blankets, winterised tents, fuel etc and now the government was in the process of pursuing the donors to materialise their promises.
Pledges of over $4 billion were in the form of soft loans - at 0.5 percent interest or service charges which could not become a debt burden unless Pakistan physically took those loans. Pakistan, however, needed these soft-term loans since its domestic resources were not enough to take up such a gigantic work in the vast mountainous areas.
Ashfaq also paid rich tributes to the leadership and international stature of President Pervez Musharraf that made the donors' conference more successful than expected. "One has to accept the reality that in today's world, President Musharraf is not taken as a politician but a visionary statesman and a leader of exceptional qualities."
The signals coming out from the donors, according to certain informed sources, are, however, different in tone and tenor. Some reports indicate that the government has been informed that no lender - bilateral or multilateral - would extend loans to Pakistan at 0.5 percent interest rate as believed by policy makers in Islamabad.
Even the IDA credit and ADB loan under the Asian Development Fund would carry an interest rate of over 6 percent in rupee terms when processing fee and currency hedging insurance is added. Some of the bilateral credits carry more than five percent interest rate. Donors also do not seem to be satisfied about the effective and transparent use of funds.
The government is believed to have tried its best to address the reservations of the donors about the proper utilisation of funds through an accounting and audit mechanism but the World Bank, ADB and other donors have ideas of their own.
In our view, the debate about the nature of assistance pledged is futile at this point of time though it needs to be recognised that world community, particularly some of the friendly countries and multilateral institutions, have been quite generous in their commitments.
That their response was due to the personality of the President is beyond any argument. However, Ashfaq Khan's idea that 60 percent of donors' $4 billion soft loans, ie, about $2.4 billion, would ultimately become grants seems to be a wish and has no firm basis. If the donors were prepared to show this much of magnanimity, there was no better occasion for just a gesture than the conference in Islamabad on 19th November when misery and helplessness of the earthquake survivors was depicted in vivid detail to evoke sympathy.
The fact that only about one third of the commitments were made in grants indicated that most of the donors preferred to get their money back with nominal interest at some future date and also wanted to have a "say" in its utilisation. Also, one third of the total commitments were made by multilateral institutions which in any case cannot be converted into outright grants or exempted from payments.
We feel that instead of entering into this kind of debate, the government officials need to work hard in certain areas. First of all, all-out efforts should be made to ensure that the commitments made at the conference are actually honoured.
Since all the promises at such forums generally do not materialise, the donors would need to be constantly reminded and cajoled to fulfil their commitments.
Secondly, it needs to be ensured, with proper input from the donors, that the funds made available are used exclusively for the stated goals in an effective and transparent manner, leaving no possibility for corruption. And lastly, an exercise needs to be initiated immediately to co-ordinate the normal budget outlays with the assistance likely to be received from the donors in order to reprioritise the expenditures and ensure optimal allocation of resources in given conditions.
Alternatively, if the decision is made to separate the two accounts, a proper mechanism needs to be put in place in order to ensure audit and accountability of the whole process. Such a mechanism will also help allay the concerns of international donors as well as opposition parties in Pakistan.