ISLAMABAD, July 31: The Asian Development Bank (ADB) will lend Pakistan $400 million to help improve functioning of capital markets, particularly in equity and long-term debt.

“This will further strengthen economy and make it more resilient to financial shocks,” said an ADB statement issued on Tuesday.

Capital market development is a key element of the government’s reform agenda due to its importance for resource mobilisation and intermediation, investment finance and employment generation.

The bank said Pakistan has made substantial progress with financial sector reforms since it suffered from a year-long economic and financial crisis in the 1990s. In spite of this, domestic capital markets do not yet play a significant role in resource-mobilisation.

In 2005, for instance Pakistani companies issued about $68 million equivalent in new capital. This compares to $3.7 billion in Thailand, $2 billion in Malaysia and $1 billion in Indonesia.

The programme loan of $400 million will support a second generation of capital market reforms initiated by the government aimed at turning domestic equity and bond markets into a relevant source of long-term finance.

“The growth of well-developed capital markets will bring Pakistan significant economic benefits through a more efficient and balanced financial system,” the statement said, adding “it will facilitate mobilisation of financial resources for productive investment and employment generation.”

The programme includes a range of policy and regulatory reforms to increase the supply and demand for securities, such as shares and bonds, and strengthen securities market oversight.

The reforms will significantly increase the number of corporate bond and equity issuances, both primary and secondary, which in turn will increase the amount of funding available for private sector investment.

Deregulation will play the key role in developing corporate bond markets which will have a range of benefits, including helping to finance infrastructure projects that require long-term financing.

Easy procedures and lower costs for issuing corporate bonds will facilitate the funding of urgently needed infrastructure, including for energy generation, and free up government resources to focus more on funding social services besides development of voluntary private pension systems.

The reforms agenda is due to be completed in two years and the loan is due to be released in two tranches – each $200 million.

The loan will have a 15-year term and include a grace period of three years.