Spearhead Analysis – 19.08.2013
By Enum Naseer
Research Analyst, Spearhead Research
International Donor Agencies
Donor agencies are fully cognizant of Pakistan’s troubles in wake of uncertainty at the global and regional levels and have time and again expressed concerns regarding Pakistan’s bleak economic outlook. Pakistan’s macroeconomic woes stem from structural weaknesses in the economy and a dearth of serious efforts aimed at taking corrective measures to find a way out of this quandary. A glaring example of apathy at the policy-making/implementation level for a significant part of its history has been the power crisis.
Chronic energy shortages have choked business activity by hindering industries from working at optimal levels and even forcing flight of capital to more favorable destinations. Private investment hence has nose-dived. The public has inevitably been at the receiving end in this scenario: it has had to bear the rising costs of conducting business which has resulted in deterioration in living standards for the less privileged classes.
An unchecked rate of population growth further amplifies the challenge of fair allocation and even survival. There is not only an excessive strain on limited resources including jobs (due to around 3% average growth) but there are obvious social repercussions.
In the public sector too, enterprises have fallen woefully short of desired performance thereby constituting a drag on public finances and growth in general. The foreign reserves of the country have been shrinking at an alarming rate while the current account deficit has continued to swell to alarming levels.
Finance Minister, Senator Ishaq Dar succeeded in wooing the IMF with what he termed to be a “very robust reform” plan. The extension of the mission’s visit was already being perceived as a good omen, later upon conclusion of the Article IV consultation discussions, stocks, bonds performed well. The IMF has agreed to provide assistance worth USD 3.5 billion spread over a 3-year period under an Extended Fund Facility. The agreement is only awaiting a formal approval from the IMF’s Executive Board.
The mission sees the budget as an ‘important step in the right direction’: one that shows ‘determination’ and can lead to an improvement in Pakistan’s ‘fiscal and external positions’. The organization has, however, asserted that the ambitious goals put forth in the budget can only be achieved by developing a strong political consensus in the central and provincial governments on a medium-term plan of ‘fiscal consolidation’ which will hinge upon an efficient and equitable tax system.
It has appreciated the government’s resolve to ensure proper integration of steps proposed in the program. There is a mutual agreement regarding the need for improvement in tax collections, widening of the tax base and an equitable distribution of the tax burden. Phasing out untargeted subsidies, exemptions and SROs are also part of the consensus. Through tariff adjustment and investment, the program will help Pakistan solve its energy and circular debt problem. Additionally, with a view to set the fiscal house in order, restructuring and privatization of public enterprises will be on the agenda. This will also help increase investor confidence in Pakistan’s future economic prospects.
The mission has given an encouraging response by stating: “broad-based domestic and international support will be crucial for the successful implementation of the authorities’ planned policies and reforms. The IMF remains committed to supporting Pakistan and its people face up to the challenges by providing financial resources and technical assistance.”
The IMF’s vote of confidence in Pakistan’s abilities to emerge out of its current predicament has had a good impact on how the economy is being viewed by other potential donor agencies. The good word in the market has led to an offer of help by the Asian Development Bank (ADB). The lending agency has offered financial assistance amounting to a minimum of USD3 billion. It has discussed the Country Operational Business Plan 2014-16 with the government under which it will give a concessionary loan of USD1.1 billion (USD3 billion). It has also asserted that it will pin its agenda with the government’s priorities. The aid is also inclusive of USD900 million for a coal-fired Jamshoro Power Generation plant (capacity: 1,200 MW).
In addition to this, the agency will help do away with obstacles to realization of potential in energy and communication sector projects. During a review meeting regarding aid offered to the economy (USD3.4 billion for 20 projects), the agency pressed for resolving outstanding issues such as delay in execution of contracts, land acquisition disputes and alleged kickbacks. The ADB is adopting a hard line this time with a ‘no-extension’ policy which means that some loans could be cancelled. Such an action is not entirely uncalled for as nearly a third of the ongoing loans remain undisbursed due to problems at the execution stage. (Commitment charges are being paid by the country which amount to 0.15% for undisbursed loans.)
The delegation expressed its dissatisfaction with the progress on Energy Efficiency Investment program worth USD60 million (approved in September 2009, expiring on December31, 2013). The program was aimed at distributing energy savers for conserving energy but had not met targets and chances are still bleak that this will happen before the time period expires.
Other projects that are facing delays include a USD243 million Power Transmission Enhancement Program-III and a USD245 million Power Distribution Enhancement Program-III and the USD285 million worth portion of the Flood Emergency Project for rehabilitation of damaged roads.
The ADB and Pakistan have not been able to see eye to eye on issues such as the land acquisition policy. The director general, Mr. Gerhaeusser has recommended the appointment of valuators to help fix the issue and pave way for an agreement. Islamabad has responded positively by setting up a “Foreign Assistance Monitoring Cell” to maintain a check and balance system for the timely disbursement and utilization of aid for development projects. The government hence has asserted its commitment to the cause.
The World Bank has also mirrored the optimism by offering aid of USD 500million (with rate of interest within the 0.75%-1% band) during FY2013-14 according to officials of the finance ministry. It is expected that the ADB will provide assistance amounting to the same figure in the mentioned time period following the IMF’s approval of the bailout package.
Optimistic yet cautious
Lending agencies have adopted an optimistic yet careful attitude. There is a realization that the government has introduced policies that will help fix some of the challenges faced by the economy yet there is also a consensus on the fact that even in resolving Pakistan’s crises implementation strategies will be a powerful determinant. The agencies have given hope and reason to think that the future will be bright given that the government follows a proper roadmap where these agencies are keen to offer expert suggestion.
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