ISLAMABAD: The World Bank has started marketing more loans to Pakistan with a formal $425 million upfront offer to finance microfinance banks and social sector projects including the Benazir Income Support Programme (BISP).

This was disclosed by the Ministry of Finance after Caretaker Finance Minister Dr Shamshad Akhtar had a meeting with a World Bank team led by its Country Director Najy Binhassine on Monday and raised questions over the proposed fresh loans to the government for the microfinance sector while public debt already faced sustainability risks. The meeting had been called to “discuss, review and finalise the financing for two World Bank-funded operations in Pakistan”.

These included additional financing of $250m for the ongoing Crisis-Resilient Social Protection Programme (CRISP), being implemented through BISP, to support the development of a more adaptive social protection system that will contribute to any future crisis-resilience among poor and vulnerable households. Under the existing programme, the World Bank is extending a $600m loan.

In addition, the World Bank has only recently crafted a new loan programme for Pakistan to extend $175m financing. Through the Resilient and Accessible Microfinance Programme (RAMP), the bank wants to provide fresh financing “to help enhance the access to microcredit and support the resilience of the microfinance sector and its borrowers.

Offers $425m for social, microfinance sectors

Considering the importance of interventions planned under the CRISP, the finance minister gave a go-ahead signal to engage the World Bank for additional financing of $250m for the programme in principle.

She, however, desired to convene another meeting next week to formalise the programme contours” and decided to invite the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan to the next meeting to finalise the programme modalities.

However, the $175m loan did not appear to have impressed Dr Akhtar. The World Bank team explained the broad contours of the RAMP, its funding volume and objectives. It was reported that the microfinance sector of Pakistan had shown resilience and continued to grow despite multiple exogenous shocks. However, sector growth and resilience had been shaken by deep and continued shocks and are currently being impeded by three cross-cutting constraints, the World Bank team pointed out.

These are related to capital, liquidity and climate shocks. Therefore, the bank designed the programme to help not only overcome the constraints of the microfinance sector but also ensure a more resilient, inclusive and growing microfinance sector.

The finance ministry said that the issue of public debt was raised during the meeting. “Raising loans for extending support to microfinance banks and microfinance institutions will increase the volume of public debt”, it said and suggested that such interventions would best be supported by mobilising local resources instead of foreign loans.

The finance minister called for “further refinement of background work for the programme and data set to ensure accuracy and desired that the World Bank team should continue working on the programme in collaboration with its financing arm — International Finance Corporation (IFC) — apparently for investment based financing rather than adding to the public debt.

Risks to debt sustainability

In its latest assessment, the International Monetary Fund (IMF) has only recently talked about risks to Pakistan’s debt sustainability while simultaneously highlighting additional financing needs. It said risks to debt sustainability remain acute given large gross financing needs and scarce external financing.

Assuming decisive implementation of programme policies, which would be sustained over the medium term, and adequate multilateral and bilateral financing, public debt would remain sustainable. However, policy slippages, insufficient financing or elevated gross financing needs, realisation of contingent liabilities and downward risks to the baseline could all undermine the narrow path to debt sustainability.

Under the new initiative, the World Bank is seeking the $175m loan to be implemented by the Pakistan Microfinance Investment Company (PMIC), State Bank of Pakistan (SBP) and National Credit Guarantee Company (NCGC). The project aims to cover the entire country to support the resilience of the microfinance sector and its borrowers in areas most impacted by climatic shocks and natural disasters, thus mostly Punjab and Sindh.

The WB has proposed project should be used for financing fertilisers, pesticides and other chemicals although it concedes that the scale of such interventions will be small and localised and involve occupational risks associated with improper handling and use of chemicals, impacts on soil from fertiliser application as well emissions particularly from unused fertilisers and soil without crop cover.

Published in Dawn, January 23rd, 2024