Pakistan wins $300 million loan from AfDB
Pakistan secured a $300 million loan from the Asian Development Bank on Tuesday to finance the budget and build up reserves that have already fallen below $16 billion.
The global lender has approved a $300 million loan to further develop Pakistan’s capital markets, promote private investment in the country and help mobilize domestic resources to finance sustainable growth, according to an AfDB statement.
Pakistani Economic Affairs Minister Omar Ayub Khan said he was “grateful” to the AfDB for approving a $300 million loan. The loan will facilitate budget support, Khan said.
Like its predecessor, Pakistan’s Tehreek-e-Insaf government ran the country by taking on very expensive foreign borrowing instead of relying on non-debt-creating inflows to increase foreign exchange reserves.
Budget support loans are taken in the name of reforms to be undertaken in various sectors – work that requires will and administrative skills, not foreign money.
Pakistan secured the budget support loan at a crucial time as its bailout talks with the International Monetary Fund are on hold.
The AfDB based the $300 million support on the sixth review instead of basing it on the results of ongoing talks.
Pakistan’s Executive Director at the AfDB played an important role in securing the unanimous approval of the loan by the AfDB Board of Directors.
The country’s reserves shrank to $15.8 billion at the end of last week, largely the result of expensive foreign loans.
Omar Ayub said the AfDB lending program aims to support demand and supply side measures to broaden and deepen the financial system in Pakistan with a sound legal and regulatory framework.
This was the second tranche under the capital market reforms after the AfDB approved the first sub-programme in 2020.
The second tranche aims to catalyze demand from institutional investors and increase the range of alternative financial instruments such as derivatives and commodity futures that are available to investors, the AfDB said.
“For several years, the AfDB has been Pakistan’s main development partner in supporting the evolution of its capital markets,” said AfDB Managing Director for Central and West Asia, Yevgeniy Zhukov. “By making the country’s capital markets more robust and strengthening public debt management, this new program will also help mobilize more domestic resources that support the government’s efforts to finance sustainable growth and respond effectively to crises,” he added.
Pakistan’s financial sector is dominated by banks and this lack of diversification increases the risk that the country cannot withstand financial shocks and periods of uncertainty, according to the Manila-based lender.
Moreover, the Pakistan Stock Exchange lacks depth in terms of the number of investors accessing it and the number of companies raising capital, while the Pakistani bond market is almost entirely dominated by government bonds.
The AfDB’s $300 million program supports policy actions that will enhance market stability and attract investor capital to Pakistan. These include structural reforms within the Securities and Exchange Commission of Pakistan that will improve governance and regulatory capacity.
It supports measures that will strengthen the public debt market and improve market surveillance systems that facilitate the exchange of information. The program also promotes an enabling environment to accelerate access to finance for the growth of enterprises and public enterprises.
These reforms will help mobilize financial resources for productive investment, especially by the private sector, and help facilitate economic growth by developing bond and equity markets, said AfDB Economist Sana Masood.
This will help reduce the cost of financial intermediation and stabilize systemic vulnerabilities in the bank-dominated financial system, she added.
Published in The Express Tribune, March 23rd2022.
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