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Pakistan signs USD 10.46bn new foreign loan agreements in FY20

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December 13, 2020 (MLN): The Government of Pakistan signed new agreements worth USD 10.46 billion with various development partners and foreign commercial banks during FY 2019-20.

The Annual Report on Foreign Economic Assistance (FEA), prepared by Policy Analysis & Development Wing of Economic Affairs Division, is intended to provide a comprehensive overview of the FEA (both in the form of loans and grants) received by the Government of Pakistan from multilateral and bilateral development partners from July 2019 to June 2020.

According to the Annual Report on FEA, out of total new agreements, 99% of the new commitments were for the loans and the rest of the 1% was for the grants commitments wherein, USD 6.79 billion worth of financing agreements were signed with multilateral development partners, USD 3.46 billion with foreign commercial banks and USD 193 million with bilateral development partners.

Going into details provided by EAD, around USD 3.46 billion worth of agreements, which constituted 33% of the total new commitments, were by the commercial banks. This high level of commercial financing was arranged to refinance maturing commercial debt during the year. The Asian Development Bank emerged as the largest development partner in terms of new commitments of FEA (30%) followed by World Bank (22%), Islamic Development Bank (7%) and Asian Infrastructure Investment Bank (5%). These five financial institutions extended financing of approx.98% of total new commitments.

During FY 2019-20, 69% of the new commitments were made under the category of budgetary support. This high level of budgetary support was secured mainly to the off-set socio-economic impact of the COVID-19 pandemic and to meet the higher external financing requirements for external debt retirements. About 26% of the new commitments were allocated for project financing while the rest of the new commitments i.e. 5% were for commodity financing. It is pertinent to mention here that an amount of USD 7.5 billion has been committed as budgetary support; of which USD 4.0 billion was committed by multilateral development partners as program financing and the remaining was obtained from foreign commercial banks.

On the sectoral distribution front, the government is receiving project financing for various sectors of the economy, which ranges from energy/power to transport &communication; and from health & education to agriculture & rural development. The sectoral composition of the commitments reflects the priority development objectives of the government. The sectoral composition of newly committed loans and grants during FY 2019-20 is summarized in Figure below.

As per the annual report, an amount of USD 6.5 billion has been disbursed by multilateral and bilateral development partners during FY 2019-20 as compared to USD 4.1 billion last year, registering 59% growth. In addition, the government also raised USD 3.4 billion from foreign commercial sources to meet its external debt obligations and support the balance of payments. Out of the total disbursement of USD 10.7 billion, 97% were loans and 3% were grants.

The disbursements of USD 10.7 billion during FY 2019-20 were mainly under the projects and programs loans/grants from multilateral, bilateral development partners and financial institutions. The figure below exhibits the composition of disbursement.

The report highlighted that the increased level of inflows from our multilateral and bilateral development partners is indicative of their commitment to support development priorities of the Government as well as the strengthening of institutional capacity to implement the reforms in the priority areas of revenue, fiscal management, debt management, PSEs, energy sector reforms and ease of doing business. These inflows are long-term and on concessional terms with a lower cost which is a reflection of the healthy composition and quality of our external public debt.

Detail of the disbursements made by development partners is summarized in Figure below. After commercial banks, ADB is the largest development partner with a disbursement of USD 2.82 billion (26%) followed by World Bank (13%), IsDB (8%) and Saudi Arabia (7%).

As mentioned earlier, the government is mainly receiving FEA in the shape of program financing, project financing and commodity financing. During the period under review,74% of the total disbursements were program financing/budgetary support, 19% project financing while the remaining 7% commodity financing mainly from Islamic Development Bank for the purchase of crude oil. Out of this total budgetary support component, USD 4.6 billion was the program support, and the remaining USD 3.3 billion was arranged as re-financing by the Finance Division from various foreign commercial banks.

Sectoral distribution of the disbursements under project financing represents sectoral priorities of the Government which is summarized in the Figure. The largest sector in terms of disbursements is Transport & Communication (32%) followed by Rural Development & Poverty Reduction sector (11%), Education (11%), Energy and Power sector (10%) and Health Sector (9%).

External financing has become an important source for developing countries including Pakistan to finance development interventions and generate economic activity in the economy.

As of 30th June 2020, Pakistan’s total external public debt stands at USD 77.9 billion. The external public debt was USD 73.4 billion last year so it grew at the rate of 6%. The composition of external public debt, shown in the figure below, demonstrates that Pakistan’s external public debt is derived from three key sources. The major source is multilateral debt (comprising 51% inclusive of IMF), followed by bilateral 31% (inclusive of China’s SAFE deposits) while the remaining 18% from foreign commercial banks and institutions (inclusive of Eurobonds and Sukuk).

The annual report underlined that Terms and conditions of loans are important for the assessment of debt servicing. Loans are generally obtained either on fixed interest rates or on floating interest rates. The main advantage of having a fixed interest rate is fully predictable interest payments and a pre-defined amortization schedule. In contrast, the floating interest rate is anchored to the prevailing market conditions and is usually indexed with London Inter-Bank Offered Rate (LIBOR), the report said.

As of 30th June, 2020,70% of total external public debt consists of loans on fixed interest rates while the remaining 30% of loans are obtained on floating interest rates.

Regarding debt servicing, the government paid an amount of USD 10.4 billion during FY 2019-20 on account of debt servicing of external public loans, consisting of principal payment of USD 8.5 billion and interest payment of USD 1.9 billion.

For the period under review, net transfers to the government were USD 1.81 billion, the report added.

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Posted on: 2020-12-13T16:29:00+05:00

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