Pakistan is likely to acquire $700m in loans from the Asian Development Bank (ADB) and France in the next two months in order to support the external account that has been strained due to the persistent trade deficit.
Sources are reported to have said that negotiations have been underway between the finance ministry and the ADB to seek two policy loans, each of $300m, in the name of Public Sector Enterprises (PSEs) Reforms-tranche-II and Sustainable Energy Sector Reforms-tranche III. In addition, a $100m loan is likely to be negotiated with the French Development Agency (AFD) France in connection with the $300m ADB energy sector loan, it has been reported.
Policy loans, unlike project loans, are disbursed upfront in one tranche that provides support to the foreign currency reserves and diversifies budget financing.
The government is trying to acquire these loans before the end of the current FY in order to support the dwindling foreign exchange reserves that have been decreasing ever since International Monetary Fund (IMF) programme concluded in September last year.
The $300m PSEs reforms had originally been planned for the next fiscal year 2017-18. As per the request of the finance ministry, the ADB has conceded to sanctioning the loan earlier and is expected to be approved late next month, sources have revealed. Sources in the finance ministry have been reported to have said that an ADB mission reviewed Pakistan’s progress on PSEs reforms loan and termed it satisfactory, said the finance ministry sources.
Sources have also been reported to have said that the government has been trying to secure a $300m energy sector loan by June. However, due to the poor performance of the sector, the government is facing difficulties in meeting prior actions.
Pakistan’s external account deficit has been escalating persistently due to the inability of the government in attracting non-debt creating foreign inflows. The current account deficit for the first nine months of the fiscal year 2016-17 soared to $6.13b, 2.6 times higher than the deficit recorded a year ago. The trade deficit rose to a stark $23.3b in just nine months.
$1.3b have already been borrowed from China for the balance of payments’ support while another amount of $750m was acquired to repay the Eurobond floated in 2007.
Sources have said that it is likely that the ADB has attached the $300m PSEs loan to 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 Rs9.4t in 2014 and total employees were 420,000, of which Pakistan Railways employed 78,000, according to the ADB documents.
Improvement in corporate governance, reporting standards and bringing transparency in these PSEs are the target areas of the $300m 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 likely to be the major beneficiaries of government’s cash assistance owing to the huge losses they have been rendering.
As per the ADB, fiscal allocation to support PSE day-to-day operations comprised of 65pc of overall budget allocations to the PSEs in the FY 2015-16, which limited the funds available for capital development aimed at improving the PSE efficiency.