Government finally spurns the multilaterals

According to a section of the press, the country’s financial managers have turned down offer of loans equivalent to 2 billion dollars from the World Bank and the Asian Development Bank (ADB) for reconstruction and rehabilitation activities in the aftermath of the August/September devastating floods.The Minister of State for Economic Affairs, Hina Rabbani Khar, has reportedly confirmed this change in government policy, a change that, according to her, followed “the meeting of the Friends of Democratic Pakistan (FoDP) held in Brussels and meetings with other development partners.” This decision must be lauded as it is reflection of a rare show of pragmatism by the country’s economic managers.The Brussels meeting offered a comprehensive three-year package of tariff concessions for Pakistani products that is infinitely preferable to any assistance from these two multilaterals, as they were offering the bulk of assistance at the LIBOR (London Interbank Rate), plus a service charge that would have ensured that the in-country international staff, as well as visits to this hapless country by their international staff, would be in a style that they have become accustomed to: business class tickets and stays in expensive five-star hotels.And even more disturbing were the statements attributed to the relevant department head in ADB, on a post-flood visit to this country that it would be new assistance, not part of the assistance pledged under the three-year, agreed country programme, and that the Bank had not yet decided on what terms to lend to Pakistan. Subsequent stories, not contradicted by the ADB, revealed that this was not to be new commitment, but part and parcel of the three-year commitment.

In addition, many an analyst argued that had it been on concessional terms, this would have been categorically stated. It is relevant to note that multilaterals calculate the amount of concessional lending as an integral component of the three-year country programming strategy, based on performance and Pakistan’s concessional lending was reduced as a result of poor performance.The World Bank, as well as the ADB staff, also indicated recently that loan write-offs are against their charter. In this context, it maybe appropriate to recall a joint World Bank-IMF statement, dated July of this year: “the decisions by the Board of Directors of both institutions will generate total debt service savings of US $12.3bn (for Congo), which include US $11.1bn under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, and US $1.2 billion under the Multilateral Debt Relief Initiative (MDRI).”

While Pakistan may not be eligible under the HIPC, meant for countries with a per-capita income of $380 a year or less, which also makes them eligible to receive MDRI, an initiative common to multilaterals other than the ADB, yet in the aftermath of the devastation caused by the floods, it was to be hoped that the boards of the multilaterals would revisit their write-off strategy and include developing countries that have suffered a natural disaster that has affected 10 percent of their population.

Pakistan, we were told by the department heads of both the World Bank and the ADB on their recent post-flood visits, had not yet reached the stage where there is a danger of default. What was obviously ignored was that Pakistan had reached a stage where more than 30 percent of its budget is routinely diverted towards the repayment of past loans, and new loans are being procured to pay off past foreign loans, leaving a small amount for development, for which assistance is ironically in the multilaterals’ charter.The press conference of Hina Rabbani Khar clarified that the federal government has not decided not to borrow at all from these two multilaterals. Or, in other words, it would procure the loans for the agreed pre-flood projects, but not allow these funds to be diverted to the reconstruction, post-floods. One is understandably tempted to advise the government to back off from any foreign borrowing that is not at concessional terms, or in the form of a grant. The reason is that the level of foreign borrowing is so high, at present, that any addition would only add further to the country’s economic woes.

In the budget for the fiscal year 2010-11, the money required to service foreign debt was earmarked at 76,797 million rupees (in contrast to last year’s total of 70,762 million rupees) while foreign loan repayment, due this year, required 174,369 million rupees budgetary outlay (last year’s total was the much lower, 148,954 billion rupees). The grand total is 2920 million dollars. Thus, while some may argue that an additional 2 billion dollars from these multilaterals would make a difference to the country’s overall debt situation and contribute to enhanced repayment next year. The government must continue to borrow what is its due under concessional lending, but the time is to stop procuring at LIBOR plus now – Brecorder