Pakistan's infrastructure gap ranges between $116 and $165 billion, according to World Bank estimates. This implies that 8-10 percent per annum spending on infrastructure is required for 5-7 years to move up the ladder on economic development. By contrast, the consolidated PSDP averaged at 3.4 percent of GDP in the last four years whilst the outstanding loans by banks and DFIs on infrastructure are 1.3 percent of GDP.
Clearly, the gap between the required and actual spending is huge. Fiscal constraints are keeping the government from expanding developmental spending, while for banks the long-term projects usually do not fit in their risk-return matrix. There is a balance-of-payment problem too, as infrastructure and industrial projects mostly need machinery imports, and if a project is financed on domestic funding then it could reduce the thin and fragile pile of foreign reserves.
The most viable way out is to arrange foreign funding for long-term projects. CPEC spending of $46 billion in the coming years is to bridge the physical connectivity and power infrastructure gap. But there ought to be more spending on industrial projects, housing mortgage, and other energy-related projects.
Recently, HBL acquired a $500 million credit line from China to lend in domestic projects. The credit line is priced at Libor plus 3.25 percent for fourteen years. This appears to be a good rate, and even at 2 percent, is cheaper than Libor plus 6 percent from foreign banks. At current rates, it is also much cheaper than domestic borrowing options. The credit line can fetch more once HBL tests the market with existing line.
That is a welcome move by the biggest bank in the country that recently acquired a license to operate in China. The bank is eying to finance Iran-Pakistan pipeline project, and may also lend to private sector for power and other projects.
There are other domestic banks searching for similar funding. Bank Alfalah is trying to build its relations with Chinese banks for financing line; but it has little or no success so far. The size of the bank is relatively smaller than HBL; probably UBL and NBP have fair chance to get credit lines if they really strive for it. Pakistan is issuing licenses to Chinese banks as well to operate here. Industrial and Commercial Bank of China (ICBC) has already completed five years of presence in Pakistan.
The presence of ICBC in Pakistan is still, low with $600 million of deposits with three branches. But the bank is all set to change gears as more CPEC projects come online. The bank may rely on ICBC head office and inter-group for credit lines.
But all commercial bank lending will be based on commercial rates and foreign funding may cost higher than the domestic counterpart. However, there is a dearth of domestic funding, especially for long-term projects. The private credit is 14 percent of GDP and 35 percent of monetary expansion in Pakistan. There is a dire need to bring money into the system by extending loans to the private sector.
There is an absence of long-term yield curve in Pakistan and the price discovery is weak for long-gestation-period projects. There is a need for subsidized windows for financing a line of long-term projects. Somehow, donor money is required to plug in the gaps both in pricing and funding. There are rumours that IFC is coming up with a credit line for projects financing in Pakistan. World Bank, ADB, and bilateral donors, too, ought to come up with both funding and capacity building for infrastructure projects and mortgage financing.
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