Out of the $2.90 billion loaned to the energy sector, only $400 million has been used to-date. The ADB is assisting Pakistan in 37 uplift projects and in a sector reform programme. The ADB has expressed its concern about the funds that have still not been used. Paying penalties on non-utilisation of loans in a country where people are suffering from lack of basic amenities of life such as education, healthcare, potable water and sanitation. More alarming is the non-utilisation of 60 percent of the granted loan, which works out to $2.7 billion. The government owes an explanation as to why the loans secured in the meantime from China's Eximp Bank for projects financing, or part thereof, is preferred over the ADB loan provided on softer terms.
In February the Pakistani government signed another agreement with the ADB according to which the bank will lend $320.50 million for projects in Punjab and Khyber Pakhtunkhwa. Under the loan development programme, Khyber Pakhtunkhwa will build 1,000 hydropower plants. Similarly, Punjab and KP will, respectively, set 17,400 and 8,187 schools on solar energy.
While a good 60 percent of the previous ADB loan remains unutilised, the rationale of signing up for another loan package with the bank defied understanding. Projects in the energy sector comprise over half the ADB portfolio for Pakistan. In 2015, the bank approved a combined loan assistance of nearly $1.4 billion for two energy sector programmes. The ADB is also helping to decongest Pakistan's overburdened transport systems, upgrading highways and provincial roads to position the country as a future regional trading hub.
Since becoming a founding member of the Asian Development Bank in 1966, the government of Pakistan has worked with the ADB to strengthen the country's key infrastructure, boost social and environmental safeguards, and promote information sharing with other countries.
The ADB remains one of Pakistan's largest development partners and has provided more than $27 billion in loans and over $531 million in grants. In 2015, the ADB approved the country partnership strategy (CPS), 2015-2019 for Pakistan, with a provisional assistance package of $3.65 billion for sovereign operations in 2016-2018.
The new CPS continues a focus on infrastructure development and institutional reforms. It outlines financial assistance in six key sectors: energy; transport; agriculture, natural resources, and rural development; water and other urban infrastructure and services; public sector management; and finance. Cumulative disbursements to Pakistan for lending and grants financed by ordinary capital resources, the Asian Development Fund, and other special funds amount to $19.59 billion.
A multi-trance financing facility (MFF) of $990 million will help introduce an advanced electricity metering system for power distribution companies, reducing losses and boosting revenue collection. Assistance of $400 million was also approved to reform policy and build an affordable and secure energy sector. Then Pakistan is supported by funding from the International Monetary Fund (IMF) which in end 2016, cleared payment to Pakistan of a final $102 million tranche in a $6.4 billion three-year programme. Prime Minister Nawaz Sharif echoed the sentiment, saying Pakistan was able to stand on its own feet economically.
"It is now my desire... that we say goodbye to the IMF," he said, addressing a group of his party's lawmakers in Islamabad shortly after the announcement of the programme's conclusion. Much of the latest wave of loans are from China to fund infrastructure and energy projects in Pakistan, the dedicated value of which could soar to $50 billion, if not more. The IMF, which has been closely monitoring Pakistan's fiscal dynamics from 2013 to 2016, expressed concerns on this.
"Chinese investments in Pakistan have the potential to lift the economy's output, but the repayment obligations that come with this investment will be serious," it warns in its latest and final review of the just concluded programme. "During the investment phase, as the 'early harvest' projects proceed, Pakistan will experience a surge in FDI and other external funding inflows," says the Fund in a short evaluation of the impact of CPEC related investments on Pakistan. However, the import requirements of these projects "will likely offset a significant share of these inflows, such that the current account deficit will widen" within manageable levels during these years.
The report estimates that CPEC related imports could reach 11 percent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2 percent of projected GDP in that year. The gross external financing needs of the country will jump almost 60 percent by then from a projected $11 billion for the current fiscal year, to $17.5 billion in 2020.
Pakistan will see $27.8 billion in "early harvest" projects under the CPEC in the next few years, with the remaining $16 billion coming over a longer timeline stretching out to 2030.
Once the Chinese investors begin repatriating profits "Pakistan will need to manage increasing CPEC-related outflows," warns the Fund, adding that the amounts involved "could add up to a significant level given the magnitude of the FDI." Outflows will also come in the form of repayment obligations on the loans taken from Chinese banks for these projects, which are expected to rise after 2021. Both of these, repayments and profit repatriation, "could reach about 0.4 percent of GDP per year over the longer run."
The Fund acknowledges that CPEC-related growth could cover these payments over the longer term, but warns that this is not guaranteed. "Reaping the full potential benefits of CPEC will require forceful pro-growth and export-supporting reforms," the report says, citing improved business climate, governance and security as necessary preconditions to enable CPEC investments to generate the resources required to cover their own associated outflows. In addition, "allowing greater downward exchange rate flexibility" will also be necessary.
It points out "a need to ensure transparency and accountability in project management and monitoring," pointing specifically at the power purchase agreements being signed with Chinese IPPs, calling on the government to ensure that the cost of power purchase "remains favourable" for the distribution companies and consumers.
In its three-year stint, the PML-N government has obtained $25 billion as fresh foreign loans, in addition to borrowing Rs 3.1 trillion ($30 billion) from the domestic market for budget financing. In dollar terms, the government's total domestic and foreign borrowings amounted to $55 billion during the last three years. Out of the $25 billion in foreign loans the government has obtained from June 2013 to June 2016, an amount of $11.95 billion was spent in repayment of previous loans.
Pakistan's debt pile has soared over Rs 22.5 trillion There was a net addition of $5.6 billion in the country's external debt during the last fiscal year 2015-16, showing a growth of 28.2 percent over the increase in foreign debt in 2014-15, according to the Finance Ministry. Similarly, in 2014-15, the net increase in debt was $4.42 billion, higher by 53 percent over the increase reported in the preceding year. During the last three years, the government paid $2.74 billion in interest on foreign loans.
Pakistan's foreign currency reserves have largely been built by obtaining expensive foreign loans, which according to independent economists is not a sustainable way to increase reserves. While mounting loans is of serious concern, of greater concern is the declining exports, stagnant FDI and sluggish agricultural and industrial growth limiting the government's means for loan payback and the prime reasons for the increasing external debt.
(The writer is former President, Oversees Investors Chamber of Commerce and Industry)
Copyright Business Recorder, 2017