May 07, 2021 (MLN): Pakistan signed new loan agreements worth USD 6.52 billion with various development partners, SAFE deposits and foreign commercial banks during the second quarter of FY 2020-21 to stabilize foreign exchange reserves and provide budgetary/balance of payments support.
Out of total new agreements, USD 3.46 billion worth of financing agreements were signed with multilateral development partners, USD 2 billion with foreign commercial banks, USD 1 billion as SAFE deposit, and USD 49 million with bilateral development partners, a quarterly report on Foreign Economic Assistance (FEA) released by Ministry of Economic Affairs yesterday said.
Around USD 2 billion worth of agreements, which constituted 31% of the total new commitments were commercial borrowing. This financing was arranged to refinance maturing commercial debt.
An amount of USD 1 billion (15%) has been arranged from China SAFE authority to repay the deposit to a friendly country.
After commercial banks and SAFE Deposit, World Bank emerged as the largest development partner in terms of new commitments of FEA (34%) followed by Asian Development Bank (9%), Islamic Development Bank (6%) and Asian Infrastructure Investment Bank (4%).
Foreign economic assistance in Pakistan is broadly categorized as Project financing, Program financing and Commodity financing.
Going by the Debt Bulletin Report, project financing is obtained for funding socio-economic and infrastructure development projects.
While program financing is secured to support the wide-ranging economic reforms and balance of payments and is generally obtained from multilateral development partners such as ADB, World Bank, AIIB, etc. (on concessional terms and conditions with longer maturity).
The commodity financing is arranged for the procurement of crude oil mainly from the IDB. In addition, the government also raises funds from international financial institutions and capital markets to meet its immediate fiscal and liquidity requirements.
During the period an amount of USD 4.38 billion has been committed as budgetary support; of which USD 1.36 billion was committed by multilateral development partners as program financing. The program financing has been arranged to broaden and deepen the financial system, improve fiscal management and regulatory framework to foster growth and competitiveness in Pakistan.
Japan has also committed to providing a grant of USD 9.7 million to combat COVID 19. The remaining amount of USD 2 billion was arranged from foreign commercial banks and USD 1 billion from the SAFE authority.
An amount of USD 1.75 billion was allocated for project financing. The remaining amount of USD 386 million has been arranged for commodity financing purposes.
With regards to project financing, the government is receiving financing for various sectors of the economy, ranging 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 Energy & Power is the key priority of the Government during the July-Dec 2020 with the total share of 68%. Finance and Revenue emerged as a second priority with a share of 17%, followed by Education (13%), and Governance (1%).
On the disbursement front, the country received USD 5.7 billion during July-Dec 2020 from multilateral, bilateral development partners and financial institutions that were mainly under the projects and programs loans/grants.
According to the debt bulletin, foreign assistance obtained by Pakistan through multilateral sources during July-Dec 2020 totaled USD 2.39 billion or 42% of total disbursements.
Asian Development Bank, World Bank, Islamic Development Bank and Asian Infrastructure Investment Bank were the main multilateral development partners.
The bulletin revealed that the collective disbursement of USD 260 million or 5% of the disbursements was from bilateral development partners particularly China, France, the USA and the UK during July-Dec 2020.
The inflows from the multilateral and bilateral development partners are indicative of their commitment to support the development priorities of the Government. These inflows are long-term and on concessional terms with a lower cost which is a reflection of the healthy composition and quality of external public debt.
During the period under review, 28% of the total disbursements were program financing. An amount of USD 1.0 billion (18% of the total disbursement) was obtained from SAFE authority to repay deposits received from a friendly country while the amount of USD 2.05 billion (36%) was obtained from foreign commercial banks.
The report stated that the amount of USD 791 million (14%) was obtained as project financing whereas the remaining 4% of the disbursement was for commodity financing purposes.
Sectoral distribution of the disbursements under project financing represents sectoral priorities of the Government. Basically, it reflects the sectoral composition of the active portfolio of project assistance in the country.
The largest sector in terms of disbursements is Energy & Power (36%) followed by Transport & Communication (21%), Agriculture (8%), Education (7%), Health (6%) and Physical Planning and Housing (5%).
External financing has become an important source for developing countries including Pakistan to finance development interventions and generate economic activity in the economy. It not only improves the efficiency of resource allocation and economic growth but also helps the government to augment its limited financial resources allocated for the provision of public goods such as health, education, safety nets, etc.
As of 31st December 2020, Pakistan’s total external public debt stands at USD 82.2 billion. Pakistan’s external public debt is derived from three key sources. The major source is multilateral debt (comprising of 50% inclusive of IMF), followed by bilateral 27%, and foreign commercial banks 11% while the remaining 13% of debt consists of SAFE deposit and Bonds (inclusive of Sukuk).
As of 31st December 2020, 70% of total external public debt consists of loans on fixed interest rates while 30% of loans are obtained on floating interest rates.
During July- Dec 2020, the debt bulletin disclosed that the government settled USD 3.40 billion on account of debt servicing of external public loans. It consists of a principal payment of USD 2.68 million and an interest payment of USD 718 million.
During the period, the majority of repayments were made against the commercial banks (47%), followed by ADB (15%), IDB (14%), World Bank (12%), Bonds (5%) and China (4%).
For the period under review, net transfers to the government debt were USD 2.90 billion. An amount of USD 1 billion was arranged from the SAFE authority to repay the deposit received from a friendly country. If that amount is excluded, then the country has net transfers of only USD 1.90 billion, the report said.
The share of concessional external loans with longer maturity increased by USD 1.28 billion (multilateral and bilateral loans) and the share of commercial borrowing has increased by USD 620 million. This indicates qualitative improvement in the external public debt stock, it added.
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