The Asian Development Bank (ADB) is due to release 500 million dollars as part of the 1.3 billion dollar loan programme for Pakistan for the current year. A programme loan is essentially used for budgetary support and contains a set of rather ambitious policy conditions that are challenging even for a country with relatively strong macroeconomic fundamentals.
Given that Pakistan's macroeconomic fundamentals are weak at present, with inflationary pressures rising by the day as subsidies are being withdrawn piecemeal, the policy options agreed between ADB and the government of Pakistan are likely to be even more exigent that usual.
Contrast ADB's decision to extend a programme loan to Pakistan with the recent denial by senior officials of the World Bank that programme lending for Pakistan is in the works because of our weak macroeconomic fundamentals; and one is forced to ask why, given the Development Financial Institutions' claim that they are harmonising policies between them, ADB continues to inject large sums of money for budget support when World Bank considers our economic situation as not right for such lending.
It is well acknowledged that ADB is a financial institution and must show a profit on its investments at the end of the year. Like the World Bank, ADB does provide concessional funding; however, the bulk of its injections are at market rates or OCR. The performance of each regional department within ADB, focusing on a particular region, is evaluated on the amount of its total lending per year. The Central and West Asia Department (CWRD), which includes Pakistan, consists of Central Asian countries which are either reluctant to incur loans (an example is the oil rich Kazakhstan) or do not have the capacity to absorb large amounts of loans because of their small economies (Kyrgyzstan, Azerbaijan etc).
Afghanistan receives 200 million dollars of grant each year which, because of its 100 percent grant element, is not expected to generate any revenue for the ADB. Pakistan, as the only country in CWRD that is not only willing but also desperate to access foreign loans as part of the newly elected government's policy options, is literally like manna from heaven for CWRD's management. And it is precisely within this context that one must view the 1.3 billion dollars package for the current fiscal year.
The government, no doubt, argues that at this point in our history, with foreign exchange reserves particularly low, it does not have the luxury to refuse any foreign currency coming into the country. This may account for our Prime Minister as well as our Finance Minister agreeing to meet with the management of CWRD who are essentially international civil servants with counterparts no higher than secretaries of various ministries. This paper holds no brief for accessing money just for the sake of balancing the budget in the short term or indeed improving the foreign exchange reserves position in the short term.
On the contrary, it is imperative that the government undertakes an indigenously formulated reform programme on an emergency basis which must include slashing expenditure on the one hand and raising progressive taxes, with a greater incidence on the rich relative to the poor, on the other.
In actual terms this implies that Public Sector Development Programme (PSDP) must not be slashed, a decision that appears to have been taken by the government in principle, but non-development expenditure like defence can be curtailed; and there is a need to revisit capital gains tax.
While granting audience to international civil servants may have been the practice in the past, the present ministers must set a new precedence. And, more importantly, the government must realise that with respect to ADB it is in a strong position to dictate terms as the largest borrower of CWRD and the second or the third largest borrower of ADB. It is pertinent to note that China and India, two big borrowers of ADB, no longer take dictation from ADB and their senior political figures do not give audience to international civil servants.
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