Raising Reserves Through High-cost Borrowing

The Government of Pakistan is on a borrowing spree these days and the country seems to be a favourite borrower among the multilateral financial institutions too. The most recent package came from the World Bank Group which approved an assistance programme of one billion dollars on 2nd May, 2014 to support Pakistan’s economic reforms. The package consists of two Development Policy Credits (DPCs) to help improve the power sector, and reinvigorate growth and investment for reducing poverty and building shared prosperity.

First DPC is the power sector reforms package of US$ 600 million. It would support the goal of developing an efficient and consumer-oriented electric power system in Pakistan to meet the needs of people and of economy. The power DPC focuses particularly on policy and institutional actions that will improve financial viability and thus reduce the burden of public financing for the sector.

Second is the ‘fiscally sustainable and inclusive growth DPC’ of US$ 400 million that would support the goal of accelerating growth to help create jobs and economic opportunities for all. The development objectives of this DPC are to increase private and financial sector development, improve business environment, facilitate trade and enhance revenues to create fiscal space for expanding social protection for the poor.

The two credits ‘to be financed from the International Development Association (IDA)’ will be on the standard IDA terms, with a maturity period of 25 years, including 5-year grace period.

Moreover, the WB’s Board of Directors also discussed a new Country Partnership Strategy (CPS) for Pakistan, envisaging a notional financial envelope of US$ 11 billion over the next five years (Fiscal Years 2015-19) for development in both public and private sectors. The said CPS ‘is anchored in the government’s framework of 4Es: Energy, Economy, Education and Extremism; and the initial priorities of the incoming Vision 2025’. It was also elaborated that to allow for quick reallocation of resources, in case of unforeseen needs or emergencies, enough flexibility was built into the CPS. The strategy also focuses the targeted support for poorer districts and vulnerable groups. The plan of leveraging regional markets would definitely create more opportunities and would help exploit the potential of cross-border trade between Pakistan and its neighbours.

Although this CPS, which envisages a notional financing of US$ 11 billion for the next five years, wasn’t approved by the WBG, yet the size of overall package, its objectives and the tone of the WB authorities, especially after the Board meeting, is quite propitious and shows their positive attitude towards Pakistan. The WB seems to have read the present economic situation of Pakistan well, and have come up with the right prognosis. The programme mainly emphasises on energy, economy, extremism and education. This, indubitably, is the right approach given the present circumstances. This package would go a long way in tackling the country’s chronic energy crisis, and bolster its economic prospects besides raising the level of education. It will also provide a measure of relief to the targeted groups of society and will hugely boost the international investors’ confidence in Pakistan’s reforms programme. The unanimous support of WB Executive Board to Pakistan also reflects the trust that the international financial institutions are now reposing in the country’s economy. It is a kind of tribute to the current government’s efforts to address economic challenges. This is quite an achievement, given the fact that multilateral financial institutions were not looking at Pakistan favourably, only a year ago.

Nevertheless the road to reforms is quite bumpy, as we have witnessed in the past few months. The resistance to fiscal reforms from some segments and failure of power companies to reduce their losses along with the re-emergence of circular debt necessitates a change in the game plan. If the reform programme is not implemented in letter and spirit, the disbursement of the WB package could be in jeopardy.

Seeking for and availing cheap IDA loan depicts that Pakistan still remains a poor country with per capita income hovering at a thousand dollars. Three countries ‘Pakistan, India and Vietnam’ are in a pool called ‘blend and capped’. Indonesia was also a part of this pool which could access from the IDA as well as the IBRD in a five-year cycle of maximum three billion a year. So just like IDA-14, there is no additionality of aid under IDA-15.

It is important to understand here that Pakistan will have to improve its macroeconomic performance to avail the US$ 11 billion over the next five years. The roadmap drawn by the government aims to bridge the supply-demand gap in electricity by raising reliance on coal as well as hydroelectricity. The situation underscores the need for reducing circular debt, passing the real cost of electricity to consumers and privatising Discos. All this is supposedly a part of home-grown programme of the incumbent government sans any help from the WB towards establishing more coal-fired or hydroelectricity generation. For that we have to rely on Asian Development Bank or our own resources.

So the way forward on both Dasu and Diamir Bhasha dams is to allocate enough resources in the PSDP to undertake the base work ourselves. Both dams being upstream of Tarbela will utilise the same water twice to generate electricity prior to its usage at Tarbela. Dasu’s design is modular and is run-of-the-river; it can generate resources for expansion of its infrastructure provided its earning is earmarked in a dedicated pool. With new technology, one could reduce future silting of Tarbela as well. But all this would be possible if we could earmark sufficient resources in our PSDP to undertake the base work settlement.

As far as coal-powered plants at Gaddani and Thar are concerned, Pakistan would have to depend on China to help it out. This could also lower government need for bank borrowing and it will force banks either to lend to industry or wait for power sector issues to be sorted out and lend to consumers. There is an overall sentiment of change and the government needs to cash it on before it once again turns sour.

Besides implementing the necessary reforms faithfully, it is also essential to be very alert in certain other areas. Every effort needs to be made to ensure that the funds available from the World Bank are utilised optimally. Corruption, wastage and underutilisation of the available resources should not be tolerated. This is the only way to achieve the intended development objectives and raise the productivity of the economy to generate surpluses in the external sector when the repayments of the loan are due. Also, it needs to be analysed whether the country should raise additional foreign exchange resources through bank loans or through the issuance of Sukuk bonds at high cost when adequate foreign funding from the multilateral institutions at a lower cost is now available. The insistence of the Finance Minister to raise the level of foreign exchange reserves to dollar 15 billion by September, 2014 and maintain the exchange rate at around the present level is not very reasonable if these targets are to be achieved through high cost borrowings and not through autonomous flows. Lastly, the government needs to engage certain top quality economists to analyse and monitor continuously the fiscal, monetary, price, debt-servicing implications etc and counterpart requirements of this unprecedented package in order to ensure sustained acceleration of growth with financial stability without major disruptions. Giving an illusion of rosy surrounding at the cost of mortgaging the economic destiny of future generations is not the proper way to move ahead.

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