ISLAMABAD: Minister for Energy Omar Ayub Khan reportedly expressed fear that actual cost-based relending policy might increase the cost of electricity as the cost of borrowing would also be included in the price of electricity, official sources told Business Recorder.
His observation came at a recent meeting of the Economic Coordination Committee (ECC) of the Cabinet when the Economic Affairs Ministry's loans relending policy 2020 came under consideration.
Ministry of Economic Affairs noted that in terms of Rules of Business 1973, Economic Affairs Division was the lead Division for arranging, negotiating and contracting external economic assistance, including project loans from multilateral and bilateral development partners. These loans are then passed-on/re-lent to the respective federal entities and provincial governments.
Terms and conditions of re-lending of external loans were governed through the relending policy of the Federal Government as announced from time to time. The last such Relending Policy was approved by the ECC in 2016 with the stipulation that it would be revised after three years. The Economic Affairs Division held a number of meetings with relevant stakeholders i.e. Ministry of Finance, the State Bank of Pakistan, and held detailed discussions on the proposed revision of the Relending Policy 2016.
It was agreed that revision in existing relending policy was required to accurately reflect the changes in the borrowing cost of the Government, exchange risk coverage (ERC) and to promote in-built fiscal incentives to encourage repayment culture by the borrowers. The average cost of external borrowing of the federal government for the last five years was 3.6 percent per annum. During the same period, Pak Rupee depreciated by 9.1 percent per annum against US Dollar. Relending rates under 2009 & 2016 Policies and the estimated rates as on June 30 2020, reflecting changes in average cost of borrowing and exchange risk cost reveal that relending rate for Federal Government was 12 percent in 2009, 9 percent in 2016 and on 30 June 2020 relenting rate to federal government was 13.1 percent, for autonomous bodies 15.75 and DFIs 13.1 percent.
Ministry of Economic Affairs further noted that the average cost of borrowing and exchange risk coverage varies with the changes in market conditions, international benchmark rates and availability of financing from various sources (commercial vs. concessional). This variability significantly exposed the federal government to cost and risk mismatches. On the other hand, the borrowing entities have consistently been highlighting high re-lending rates charged by the federal government and high financing cost. Thirdly, a large amount of re-lent loans was overdue as many borrowing entities were defaulting on their debt servicing obligations. Therefore, EAD argued that the proposed relending policy should address such inherent flaws of existing relending policy. And it was proposed to relend foreign loans on the same financing terms as borrowed by the Government of Pakistan to all entities similar to provinces.
The sources said, 2 percent penal interest will be charged on amounts that remain unpaid for 30 days after due date. One time fixed administrative charges at the rate of 0.25 will be charged at the time of each disbursement. DFIs are allowed to charge 3 percent further spread from end borrowers.
Ministry of Economic Affairs proposed relending policy 2020 was mainly guided by the following key considerations: (i) reflect changes in borrowing cost of the government;(ii) take into account variation in the exchange rate;(iii) reduce risk of the Federal Government and;(iv) pass on actual rates to the borrower for transparency.
During the ensuing discussion, Secretary, Economic Affairs Division informed the meeting that the primary objective was to cover the costs of borrowing as most of the borrowing agencies were either defaulting in repayment or accumulating arrears on account of delayed payments. The Minister for Power stated that it might increase the cost of electricity as the cost of borrowing would also be included in the price of electricity. The Finance Secretary supported the proposal. The Advisor to the Prime Minister for Industries and Production also supported the proposal while highlighting that one time fixed administrative charges should be kept minimal in order to avoid burden on the borrowing agencies.
Copyright Business Recorder, 2020
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