Sources said that the Economic Co-ordination Committee (ECC) of the Cabinet on January 12, 2009, was apprised that in pursuance of the ECC's decision, arrived at it in its meeting on August 11, 2009, the EAD had developed viable options for revision of 're-lending policy' for foreign loans/credits which are:
(i) provinces may avail re-lending of foreign loans on the same terms and conditions on which loans are signed by the GoP, the Exchange Risk Cover (ERC) will have to borne by the provinces; (ii) provinces may avail ERC from the GoP, then they will have to get lending of foreign loans as per formula approved by the ECC in its meeting on March 3, 2009 ie by paying 12 per cent interest rate per annum (5.2 per annum interest rate and 6.8 per cent per annum ERC fee); (iii) provinces may get ERC hedging from the commercial banks and open market; and (iv) provinces may avail re-lending from the GoP on last three primary auctions moving weighted average cut-off yields or related tenor's Pakistan Investment Bonds (PIBs).
This effectively determines the rate at which the GoP is borrowing funds from the domestic market for the long term and represents actual cost to the GoP, sources added. They said that these options were discussed at a meeting attended by the representatives of SBP and those of provincial governments. However, the meeting remained inconclusive.
The ECC was informed that demand of all the provinces that foreign loans and credits be re-lent to them on the same terms and conditions at which loans and credits are signed by the GoP and that ERC should be borne by the GoP. Punjab and Sindh, however, proposed that the federal government should bear the ERC of loans borrowed for investment in social sector and continue to pass on ERC to provinces in case of loans for other sectors.
After detailed deliberations, the ECC decided that the provinces should avail re-lending of foreign loans on the same terms and conditions on which loans are signed by the GoP and bear ERC and allowed the provinces to borrow/get credit directly through the sale of bonds after having devised a mechanism in consultation with the EAD and SBP. Sources said that EAD, which submitted its summary to the ECC, would constitute another committee to devise a comprehensive mechanism with regard to sale of bonds, as it has received the decision.