ADB approves $1.3bn in immediate budget support, Pakistan energy sector reform

• Special Policy-Based Loan is part of a comprehensive multidonor economic reform program led by IMF.
•  The financing was approved after Pakistan govt implemented a series of IMF-supported reforms.
• ADB approved $300 million policy-based loan to address constraints in Pakistan’s energy sector.

The Asian Development Bank (ADB) approved on Friday $1 billion in immediate budget support to Pakistan, aiding the country’s public finances and strengthening a stagnating economy.

“The quick dispersing Special Policy-Based Loan is part of a comprehensive multidonor economic reform program led by the International Monetary Fund (IMF) to stabilize Pakistan’s economy after a major deterioration in its fiscal and financial position in mid-2018 caused growth to slump and threatened progress in alleviating poverty,” ADB said in a statement.

The ADB’s financing was approved after Government of Pakistan implemented a series of IMF-supported reforms and actions to improve its current account deficit, strengthen its revenue base, and protect the poor against the social impact of the economic crisis.

“ADB is committed to providing wide-ranging support to strengthen Pakistan’s economy and reduce the risk of external economic shocks,” said ADB Director General for Central and West Asia Mr. Werner Liepach. “These funds will meet the government’s emergency financing needs to prevent significant adverse social and economic impacts and lay the foundations for a return to balanced growth.”

Pakistan is marred by economic challenges owing to a large balance of payments gap and critically low foreign exchange reserves together. Back in July, the IMF approved a three-year $6 billion Extended Fund Facility (EFF) to finance the government’s economic reform program.

ADB Approves $300 Million to Reform Pakistan's Energy Sector

Furthermore, ADB approved a $300 million policy-based loan to address Pakistan’s financial sustainability, governance, and energy infrastructure policy constraints in energy sector.

“The financing will support the first of three subprograms totalling $1 billion under the Energy Sector Reforms and Financial Sustainability Program,” stated ADB in a statement.

“The cash shortfall across the power supply chain in Pakistan, also known as circular debt, has shot up to more than $10 billion and is a longstanding chronic issue ailing the country’s power sector,” said ADB Director General for Central and West Asia Mr. Werner Liepach. “A comprehensive and realistic Circular Debt Reduction Plan, assisted by ADB in close coordination with other development partners, is the cornerstone of this subprogram. The plan aims to drastically cut the new flows of circular debt and provides policy directions on addressing accumulated circular debt.”

ADB said that Pakistan suffers challenge of inefficiencies, distortions, and uneven reform progress in the power sector. These inefficiencies were estimated to have cost the country’s economy up to $18 billion, or 6.5% of gross domestic product, in 2015.

The Bank said that their energy reform program aims to address the underlying causes of circular debt with a focus on improving inadequate tariff and subsidy systems, strengthening energy accounting, and reducing generation costs.

ADB will finance the program with support from its development partners. The Export–Import Bank of Korea has confirmed it will provide $80 million in cofinancing for the first subprogram.