Government signs $1.3 billion loan agreement with ADB

The government of Pakistan on Monday signed a loan agreement worth $1.3 billion with the Asian Development Bank (ADB) for budgetary support and power sector reforms.

The loan agreements were signed by Dr Syed Pervaiz Abbas, Secretary Economic Affairs Division (EAD), and Xiaohong Yang, Country Director ADB. Federal minister for Economic Affairs Division (EAD) Hammad Azhar witnessed the loan signing ceremony.

According to officials, the loan of $1 billion for emergency budget support has been taken for seven years at an interest rate of LIBOR+ 2 percent. Further the $300 million loan for energy sector has been taken at 2 percent per annum interest rate that will be paid back in 20 years.

Soon after signing the loan agreement, the EAD minister took to Twitter while saying that the sums will be disbursed today (Monday) and claimed that it would be the single largest disbursements in one day to any country by the ADB.

Azhar tweeted, "The government of Pakistan and ADB have scaled up their partnership today (Monday) with the signing of USD 1 billion special policy based loan for macroeconomic stability and USD 300 million for energy sector and financial sector reforms-(It is) single largest disbursements in one day to any country by the ADB. Economic Affairs Division and ADB have signed policy based loans of USD 1.3 billion today (Monday). The sums will be disbursed today (Monday) and will help bolster reserves and strengthen our economic outlook. The above disbursement reflects the confidence that multilaterals hold in the government's reform agenda and the progress achieved towards economic stabilization. ADB is a valuable contributor in Pak's development path."

Under Special Policy-Based Loan (SPBL) facility, the ADB has committed to provide one billion dollars for economic stabilization program. This program is aimed at improving exchange rate management; strengthen public financial management to mobilize more revenues; restore allocative efficiency of scarce public resources; address the power sector pricing issues; and reduce the social impacts of macroeconomic stability measures by improved targeting and transparency of existing social protection programs.

Out of total $1.3 billion loan, $ 300 million are allocated to energy sector reforms & financial sustainability program (Subprogram 1). The objective of the facility is to address issues regarding energy shortfalls, technical lacunas and policy related shortcomings in the country's energy sector. The program will help secure financial sustainability by controlling new accumulation of circular debt; strengthen governance by rationalizing competitive market roadmap, separation of policy and regulatory functions in hydrocarbons sector, appointment of appellate tribunals, implementation of multi-year tariffs and unbundling of gas sector; and reinforce infrastructure improvements through integrated planning to facilitate public and private sector investment across the energy supply chain.

According to an official statement, Azhar acknowledged ADB's continued support for Pakistan. The minister expressed that ADB's policy-based lending will not only strengthen the foreign exchange reserves but will also provide fiscal space to the government for implementing its reforms agenda and boost economic activities in the country. The provision of program lending by ADB is indicative of the government's successful policies for macroeconomic stability and reforms, he added.

The ADB country director stated that ADB is one of the leading development partners of Pakistan. The ADB fully supports the government's development vision and policies. She expressed that ADB is providing its support to the government for policy reforms and project financing in the key priority areas such as energy, road, social sector, water and irrigation and urban services.

The ADB is committed to providing wide-range financing options to strengthen Pakistan's economy and reduce the risk of external economic shocks, she added. She also reiterated ADB's strong commitment to further strengthen and expand its partnership with Pakistan.

The ADB's financing was approved after the government implemented a series of IMF-supported reforms and actions to improve its current account deficit, strengthen its revenue base, and protect the poor against the social impact of the economic crisis, the Bank added.

Pakistan is facing significant economic challenges on the back of a large balance of payments gap and critically low foreign exchange reserves together with weak and unbalanced growth.

While the country's economy has a history of boom and bust economic cycles, it reached a tipping point in 2018 after foreign investment shrank sharply in an uncertain political and global economic environment and the ongoing poor performance of state-owned enterprises caused public debt to reach unsustainable levels, the Bank added. In July, the IMF approved a three-year $6 billion Extended Fund Facility (EFF) to finance the government's economic reform program that aims to put Pakistan's economy on the path of sustainable and inclusive growth.

The EFF is expected to catalyze at least $38 billion in financing from Pakistan's development partners.

The ADB has committed to providing a total of $2.1 billion in policy-based lending during fiscal year 2019-2020 to support the reform program, it added.