WB, ADB to provide $4 billion in budget, balance of payment support

Heads of both the banks write joint letter to PM Imran Khan; say Pak govt strengthening its debt management framework by establishing an integrated debt management office and a macro-fiscal function in Finance Division

ISLAMABAD                 -              The World Bank (WB) and Asian Development Bank (ADB) would jointly provide about $4 billion in budget and balance of payment support to Pakistan over the next 18 months to address the immedi­ate impacts of COVID-19, mitigate socio-economic disruption and support reforms.

In addition, both the banks would continue to work with the govern­ment to accelerate or repurpose the existing commitments in in­vestment projects and the fiscal year 20/21 pipeline to support re­covery and resilience across the country.

President WB David Malpass and President ADB Masatsugu Asak­awa have written a joint letter to Prime Minister Imran Khan urging the government to stay the course on the medium-term structural re­forms that will enable Pakistan to make a stronger and quicker recov­ery as the crisis subsides. The two institutions recognized that impor­tant structural reforms implement­ed before the onset of COVID-19 by the government were starting to stabilize Pakistan’s economy.

The Presidents said that five structural reforms remain critical to a strong economic recovery and would benefit from your contin­ued personal leadership. They said it will be important to harmonize general sales tax across the country and eliminate the special treatment of agriculture income for purposes of income taxation. These meas­ures will increase revenues and re­duce compliance cost and tax eva­sion. At the same time, they urged the government not to grant new concessions to privileged business­es.

They noted that the government is strengthening its debt manage­ment framework by establishing an integrated debt management of­fice and a macro-fiscal function in the Finance Division. These are im­portant institutional anchors for the medium-term macroeconom­ic framework. The crisis also pro­vides an opportunity to re-exam­ine the subsidy regime and make it fiscally sustainable and better pur­posed to support the poor and vul­nerable. The debt sustainability framework for Pakistan will need to substantially increase the trans­parency of debt and investment, in­cluding through an integrated debt management function.

They also acknowledged the re­cently announced Global Debt Re­lief Initiative. “In this, we would like to note the G20 agreement of 15 April 2020, which supported a time-bound suspension by all bi­lateral official creditors of debt ser­vice payments for countries that request forbearance starting on May 1. We are pleased to learn that Pakistan wrote on May 1, 2020, to its bilateral creditors seeking debt standstill as per G20 agreement of 15 April 2020.”

They also acknowledged the gov­ernment’s commitment to use the fiscal space generated by this tem­porary debt service suspension to prioritize expenditure to support the poor and vulnerable.

In the energy sector, the WB and ADB recognized that the federal cabinet has recently approved sig­nificant actions to reform the pow­er sector and work is underway. It will be important now to im­plement the measures to reduce the cost of power, including by re­viewing expensive power purchase agreements in a transparent man­ner; avoid non-transparent com­mitments on debt and investment; disclose the terms and costs of ex­isting commitments; implement institutional reforms, including performance metrics for sector en­tities to reduce losses and improve collections; and accelerate renew­able energy deployment through private investments. This path will improve sector financial viabili­ty by significantly reducing circu­lar debt.

Meanwhile, in financial sector, the decisive reforms implemented by the State Bank of Pakistan (SBP) to adopt a market-determined ex­change rate and the government’s decision to phase out borrowing from the SBP to finance the budget deficit have closed the current ac­count deficit and moved Pakistan to a sustainable external position. These reforms have also improved investor confidence. We would rec­ommend that these reforms be pre­served by amending the SBP Act to codify the independence of the SBP in running monetary policy. The Se­curities and Exchange Commission (SECP)’s work on reforming finan­cial markets requires amendments in the SECP Act to enhance its gov­ernance and operational efficiency, and the enactment of new legisla­tion to promote issuance of deriv­atives are required to push the re­form process forward.

In investment climate, the WB and ADB noted that increasing pri­vate investment and export capa­bilities of the economy will be crit­ical to improving Pakistan’s growth prospects. In this regard, reforms to streamline and digitize regula­tions, reduce and eliminate inef­fective subsidies and market dis­tortions including in agriculture and water, allow the private sec­tor a bigger role in the provision of economic services -- through cor­poratization and ambitious divest­ment of state-owned enterprises, and improving the development fi­nance architecture will enable Pa­kistan to boost its lagging invest­ment rate to higher levels.

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