Pakistan’s reliance on external economic assistance – in the form of grants and loans from bilateral, multilateral, and commercial foreign sources – continues to grow. As per the latest data from the Economic Affairs Division (EAD) for the period from July 2020 to May 2021, foreign economic assistance had reached $12.13 billion, showing 63 percent increase over $7.45 billion in the same period last fiscal. With one month to spare, the government has nearly met its $12.23 billion budgetary target on this count.
The inflows are dominated by foreign loans, which also explain the bulk of the $5 billion in additional external financing received in the fiscal year thus far. The first, and meager component of foreign assistance, is foreign ‘grants’. During 11MFY21, this type of aid came up to $232 million (or 2% of total foreign assistance). Share of grants in overall assistance has been declining over the past several years, which pushes the country’s reliance on loans.
The top-three sources of foreign grants during the period include the United States at $102 million, with major funding going to Mangla Dam Up gradation and Kurram Tangi Dam. The United Kingdom provided $50 million in grant, most of it for the BISP cash-transfer program and education projects in Punjab. The Multi Donor Trust Fund chipped in about $40 million in the period, financing programs related to national immunization support and sundry social sector schemes across different provinces.
Over 98 percent of total foreign assistance, or nearly $12 billion, in the eleven-month period was composed of borrowing from multiple sources. Loans from multilateral agencies had reached $3.32 billion, or 27 percent of overall assistance received by Pakistan during the period under review. Among the top multilateral financiers are the Asian Development Bank, which loaned $1.28 billion, mostly for projects in power sector, transportation, trade competitiveness, capital markets, and to fight Covid-19.
A close number two is the World Bank that provided $1.28 billion in the eleven-month period via its IDA and IBRD arms, financing projects in the fields of governance reforms, water and irrigation, agriculture, power sector, tourism development, nutrition, and urban management. The Islamic Development Bank extended financing of $532mn in the period, mostly for purchase of crude oil, but also for polio eradication and education schemes. The Asian Infrastructure Investment Bank loaned Pakistan $252 million in 11MFY21, almost all of it for the RISE (Resilient Institutions for Sustainable Economy) project.
Meanwhile, borrowing from foreign banks had grown to $3.6 billion in Jul-May FY21, accounting for 30 percent of the country’s overall foreign assistance inflows in this period. These commercial loans, which were incurred for budgetary support, included $1.3 billion in disbursements from ICBC China, $815 million from Dubai Islamic Bank, $600 million from SCB London, $370 million from Emirates NBD, $324 million from Ajman Bank, and $200 million from Credit Suisse/UBL.
Loans from bilateral sources were $230 million (2% of overall inflows) during the period under review. China was the leading bilateral source, providing $178 million in bilateral loans. During the fiscal, China also provided ‘Safe China Deposit’ worth $1 billion (8% of overall economic assistance) for budgetary support – this deposit is not listed by the EAD under bilateral head. Pakistan also raised $2.5 billion from Eurobonds, accounting for 21 percent of overall economic assistance received in the period under review.
Given the scale of the external debt obligations, there is no way around seeking higher foreign economic assistance. However, the federal must undertake beneficial reforms as identified by multilaterals to unlock more of their financing, in order to reduce the country’s reliance on expensive, short-term borrowing from foreign banks. Besides, the provincial governments need to make a better case to bilateral and multilateral donors to access more grant-based funding instead of just signing up for loans.