ISLAMABAD, Nov 27: The Group-7 of leading international donors is facing internal differences over the disbursement of over $6 billion funds for reconstruction and rehabilitation efforts in Pakistan’s earthquake-hit areas, it has been learnt.

Informed sources told this correspondent that a crucial meeting of the donors’ coordination and monitoring committee would be held this month with Prime Minister Shaukat Aziz and his advisor on finance Dr Salman Shah.

The sources said the government had been informed that no lender - bilateral or multilateral - would extend loans to Pakistan at 0.5 per cent interest rate as believed by policy-makers in Islamabad.

The group of seven core donors, who are part of the coordination and monitoring committee, include the Asian Development Bank (ADB), Department for International Development (DFID) of UK, the European Union, Japan, the United Nations, USAID and the World Bank.

The sources said the government had tried its best to address reservations of the donors over transparent utilization of quake funds through an accounting and audit mechanism.

However, the World Bank and a couple of other donors have proposed to put in place a parallel system of funds utilization outside the normal budget operations. The World Bank has proposed to constitute a private sector panel, comprising private sector specialists and NGOs, to disburse quake funds at provincial, district and local level because of poor capacity of the district and local governments.

On the other hand, the ADB, which has been the champion of devolution of power, has proposed to release funds to the provincial, district and local governments for project implementation in the process of reconstruction and rehabilitation.

Supported by the DFID of the UK and European Union, this group wants to strengthen the capacity of the district and local governments for effective utilization of the funds.

This group has taken the position that a parallel system of disbursement of funds and implementation of projects had failed to achieve desired results in the past and major part of foreign funding had been misused, like in the case of the Social Action Programme of the mid-1990s.

Another group, particularly the United States, is not ready to amalgamate its assistance into the overall donors fund and wants to spend it at its own under USAID-specific projects.

The World Bank and the ADB will together contribute $2 billion soft term loan. The cheapest loan in the $4 billion soft term loans pledged by the international donors is International Development Assistance (IDA) of the World Bank.

The IDA credit has a maturity period of 35-40 years with a 10- year grace period before repayments of principal amount begins. There is no interest charge, but the credit carries 0.75 per cent service charge on funds paid out and goes up to one per cent when processing fee is also included, according to the World Bank sources. In rupee terms, this translates to over six per cent interest when hedging insurance cost is included.

The ADB loan under the Asian Development Fund, the cheapest ADB facility, has maturity period of 24-32 years with eight years of grace period.

It carries one per cent interest charge during the grace period and 1.5 per cent during the amortization period. In rupee terms, this translates into more than seven per cent interest when processing fee and currency hedging insurance is included.

The third largest loan commitment has been made by the Islamic Development Bank which has no special terms and conditions.

The remaining bilateral creditors have different definitions of their soft terms loans and normally carry more than five per cent interest rate.