ISLAMABAD: The Asian Development Bank (ADB) on Friday approved $1.5 billion in financing to Pakistan to provide social protection, promote food security and support employment for its people amid devastating floods and global supply chain disruptions.

The approved funds would be immediately disbursed to Pakistan next week and are expected to help build foreign exchange reserves and rein in the depreciation of the rupee.

Pakistan’s total foreign exchange reserves declined to $13.25bn as of Oct 14 which included the State Bank of Pakistan (SBP) reserves at $7.597bn, equivalent to about five months of controlled imports. Pak rupee traded at 221 against the dollar on Friday. The current account deficit in the first quarter of the current fiscal year (July-September) was recorded at $2.2bn, down 37pc against $3.5bn of the same period last year.

Finance Minister Ishaq Dar immediately welcomed the decision of the ADB board of directors to approve a fresh loan to Pakistan through his Twitter handle. “Alhamdulillah! Asian Development Bank’s Board has approved today the BRACE facility of $1.5bn for Pakistan. Agreement signing and release of funds in the week beginning Monday Oct 24,” he tweeted.

Fresh loan will boost SBP reserves, check rupee’s depreciation

The Manila-based lending agency in a statement announced that the loan, provided under ADB’s Building Resilience with Active Countercyclical Expenditures (BRACE) programme, will help fund the government’s $2.3bn countercyclical development expenditure program designed to cushion the impacts of external shocks, including the Russian invasion of Ukraine.

The $1.5bn BRACE support to Pakistan under countercyclical programmes was earlier planned for post-Covid recovery. The Planning Commission had expressed reservations over the interest rate but later gave in owing to challenging foreign exchange conditions.

The Planning Commission wanted this to be soft financing at around 2pc interest instead of ordinary capital resources (OCR) that attract about 3.15pc interest. This includes an interest rate of Secured Overnight Financing Rate (SOFR) topped with 0.75pc and a surcharge, finally working out at about 3.15pc. Normal SOFR is about 2.3pc. The programme is outside the normal financing programme of the ADB and is relatively softer in terms of conditionalities.

“Pakistan’s recovery from the Covid-19 pandemic has been impeded by external shocks,” said ADB Director General for Central and West Asia Yevgeniy Zhukov. “Increasing business costs and rising living expenses are affecting millions of Pakistanis, especially the poor and vulnerable. ADB’s programme will help the government manage the impacts of high prices, increasing food insecurity, slowing business activity, and reducing income for vulnerable groups, many of whom are also reeling from the devastating floods”, the announcement said.

It said the financing will provide the fiscal space needed for the government to implement its countercyclical development expenditure package, which is designed to target the poorest families in Pakistan who are often disproportionately affected in times of crisis. The government’s support includes specific measures to promote gender empowerment and climate change adaptation, which have become even more important in light of the recent floods.

ADB’s assistance will help expand the number of families receiving cash transfers from 7.9 million to 9 million, increase the number of children enrolled in primary and secondary schools, and enhance geographic coverage of health services and nutritional supplies for pregnant and lactating mothers and children under two years old.

“The programme is part of a comprehensive and well-coordinated package of support. It will help the government deal with the impact of the immediate shocks to the economy, while, in parallel, continuing the structural reforms that are necessary to improve the country’s medium- to long-term macroeconomic prospects,” said ADB Director for Public Management, Financial Sector, and Trade Tariq Niazi.

“We are working closely with the International Monetary Fund and other development partners to ensure that our support through policy dialogue, technical assistance, and program lending is well-coordinated and that, ultimately, we are able to help the government improve Pakistan’s resilience to shocks”, Mr Niazi said.

ADB’s $1.5bn countercyclical support is part of a significant response package to support people, livelihoods, and infrastructure in Pakistan in the wake of the recent floods which have affected over 33 million people and caused extensive damage to infrastructure and agriculture.

Early this month, the ADB promised up to $2.5bn loan disbursements to Pakistan to help support flood relief activities before end-December.

Published in Dawn, October 22th, 2022