Borrowing spree to continue as Pakistan now seeks $700m

ISLAMABAD: Pakistan is seeking $700 million for balance of payments’ support in the next two months from the Asian Development Bank (ADB) and France, loans that are aimed at offsetting pressure from the external account that has come under strain due to a growing trade deficit.

The finance ministry is in negotiations with the Manila-based lending agency to seek two policy loans, each of $300 million, in the name of Public Sector Enterprises (PSEs) Reforms-tranche-II and Sustainable Energy Sector Reforms-tranche III, said sources. A $100-million loan by the French Development Agency (AFD) France is also pegged with the $300-million ADB energy sector loan, they added.
Unlike project lending that is disbursed as work on the scheme progresses, policy loans are paid upfront in one tranche that helps the government build foreign currency reserves and diversify budget financing.

The government is trying hard to receive both these loans before June-end aimed at supporting foreign exchange reserves that have been on the decline since expiry of the International Monetary Fund (IMF) programme in September last year.

The $300-million PSEs reforms had originally been planned for the next fiscal year 2017-18. On the request of the finance ministry, the ADB has advanced the calendar and the loan is expected to be approved late next month, the sources said.

An ADB mission recently completed a visit to Pakistan and termed the progress on PSEs reforms loan satisfactory, said the finance ministry sources.

Meanwhile, the ADB on Monday formally announced Xiaohong Yang as the new Country Director for Pakistan, who assumed office on the same day. She is ADB’s first woman Country Director in Pakistan as well as the first national of the People’s Republic of China (PRC).

Yang will bring to this key position strategic leadership and considerable experience in the region to support Pakistan’s transformation, said Sean O’Sullivan, Director General for Central and West Asia at ADB.

Yang will spearhead ADB operations in Pakistan to support the country’s development goals through regional initiatives such as China-Pakistan Economic Corridor (CPEC) and Central Asia Regional Economic Cooperation (CAREC), according to a handout issued by the local office of the ADB.

The sources said that the government was also making efforts to get a $300-million energy sector loan by June, but due to poor performance of the sector the government is facing difficulties in meeting prior actions.

Pakistan’s external account has come under pressure after the government could not attract non-debt creating foreign inflows. The current account deficit for the first nine months of fiscal year 2016-17 rose to $6.13 billion, which was 2.6 times higher than the deficit recorded a year ago. The main reason for the widening current account deficit was the trade deficit that ballooned to $23.3 billion in just nine months.

The government has already borrowed $1.3 billion from China for balance of payments’ support while another amount of $750 million will be obtained within a month to repay the Eurobond floated in 2007.

It seems that the ADB has not attached the $300 million PSEs loan with privatisation of power distribution companies. The sources said that the ADB’s conditions are largely focused on bringing administrative and financial improvement in the PSEs.

The federal government owns 191 PSEs, comprising 176 companies, eight financial institutions and seven federal authorities. The assets of the PSEs were estimated at Rs9.4 trillion in 2014 and total employees were 420,000, of which Pakistan Railways employed 78,000, according to the ADB documents.

Close to 150 PSEs are reporting losses. Reported financial information needs to be treated with caution, however, as many entities do not have appropriate accounting policies and audit and internal control procedures in place, according to the ADB.

Improvement in corporate governance, reporting standards and bringing transparency in these PSEs are the target areas of the $300 million PSEs loan. Pakistan Railways will have to improve its reporting standards by adopting IFRS during the next fiscal year.

Pakistan International Airlines, Pakistan Steel Mills, power distribution companies, and Pakistan Railways are major recipients of government cash assistance due to huge losses that they are incurring.

The ADB said that in fiscal year 2015-16, fiscal allocation to support PSE day-to-day operations constituted 65% of overall budget allocations to the PSEs, severely limiting critical capital development expenditures to improve PSE efficiency.

Source: The Express Tribune