‘Extensive’ borrowing in foreign currency: Two govts blamed for worsening external debt

ISLAMABAD: The caretaker Finance Minister, Dr. Shamshad Akhtar has reportedly accused both previous PTI and coalition (PDM+PPP) governments for “extensive” borrowing of forex during last five years to meet local expenditure, which had increased the burden of foreign debt of Pakistan substantially, well informed sources told Business Recorder.

She made these remarks during a recent meeting of the ECC when a proposal of Finance Division was tabled titled “addendum to the Subsidiary Grant Agreement (SGA) - Financial inclusion & Infrastructure Project and exemption from Re-lending Policy for release of funds to SBP.”

On January 9, 2024, Finance Division briefed the ECC that the Financial Inclusion and Infrastructure Project (FIIP) was launched in year 2017 under the ambit of the National Financial Inclusion strategy (NFIS) - 2015. FIIP was a World Bank funded project with a total portfolio of $ 137 million. The project was originally designed with tenure of five years that concluded on December 31, 2022. Meanwhile, in the wake of floods in year 2022 and some other delays that the project faced due to Covid -19 a 30-month extension till June 2025 was accorded. Subsequent revision in the PC-I of the project was approved by the ECNEC in 2023.

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The project had three main components. An amount of $ 127.6 million was allocated for components 1 & 3 to be executed by the State Bank of Pakistan (SBP), whereas $ 9.4 million were allocated for component number 2 to be executed by the Central Directorate of National savings (CDNS). Consequently, $ 127.6 million was transferred to SBP as grant for execution of component 1 and 3 as section 17 (16) (b) of SBP Act 1956 bars the Bank from such borrowing. In light of said section, exemption from the specified terms in the Re-lending Policy of the Government was allowed by the ECC in December 2017 for $ 127.6 million.

Accordingly, a subsidiary Grant Agreement (SGA) was signed between EAD and SBP in March 2018 for provision of $ 127.6 million as grant to SBP. Component 2 (CDNS) could not take off due to multiple reasons, and $ 9.24 million was repurposed to component 3 specifically for flood impacted households. Break-up of allocation in each component of the project, before and after repurposing was as follows: (i) direct support to NFIS implementation -original allocation $ 17.6 million- allocation after repurposing $ 16 million ;(ii) supporting expansion of access points for financial services (CDNS)- original allocation $ 9.4 million- allocation after repurposing $ 0.16 million and ;(iii) improving access to microfinance and to financial services for micro, small and medium enterprises- original allocation $ 110.1 million- allocation after repurposing $ 120.84 million.

Finance Division in a letter of June 26, 2018 advised the SBP to create a special Reserve Fund for the amount provided to SBP for Line of Credit and that the Fund would be returned to the Federal Government after the termination of Line of Credit. In line with direction, a total amount of $ 136.39 million would now be entrusted to SBP for execution of components l and 3 under FIIP. Consequently, reclassification of the amount provided to the SBP would be required after repurposing: i.e. fund of $ 118.84 million (for component 3/ Line of Credit), grant $ 17.15 million (for component 1 & 3).

The repurposing and reclassification had been concurred by both SBP and EAD. The same repurposing had accordingly been reflected and was approved by the ECNEC in the revised PC-1. So far $ 110.53 million has been disbursed and for further disbursement, the signing of SGA amendment would be required.

Finance Division submitted following proposals for consideration and approval of the ECC: (i) reclassification of $118.4 million being allocated to the SBP in component 3 (a) and b(ii) of the project as ‘Fund’ and $ 17.55 million for components 1 (a), 1(b), 1 (c) [ii, iii, and iv] and 3(b)(i) of the project as ‘Grant’; as a result of re-purposing and modification of existing exemption accordingly and ;(ii) approval to record the aforementioned modifications in form of addendum to the SGA, to be signed between SBP and EAD.

During the ensuing discussion, the caretaker Finance Minister, Dr Shamshad Akhtar observed that extensive borrowing of forex was made during last five years to meet local expenditure, which had increased substantially the burden of foreign debt of Pakistan. There was a dire need to lessen the dependency on foreign loans for local expenditure. Further, SBP was a regulator; therefore it should not become involved in business and should strictly restrict itself to its allotted functions. Moreover, payment for the purpose should be made by the SBP from its own resources.

Copyright Business Recorder, 2024