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There is no free lunch, they say. But when it comes to developing countries, “grants” from richer nations have been sustaining the former’s appetite in return for strategic and economic concessions. Here in Pakistan, too, foreign grants have been a regular part of government’s diet, albeit the serving size of these non-debt inflows have much reduced over the past decade.

As per the latest data from the Economic Affairs Division (EAD), foreign grants received by Pakistan had summed up to $250 million in the just-concluded fiscal year 2020-21. That’s a sizable decline of 22 percent year-on-year. This was, of course, during a time when the focus of traditional donor countries turned inwards due to the devastations brought by the Covid-19 pandemic.

Resultantly, foreign grants’ share in Pakistan’s overall foreign assistance (which includes loans) had reduced to 2 percent in FY21, down from the 5 percent average seen in the previous five years. There has been a long-term decline in the grant inflows. As a contrast, foreign grants had totaled $676 million back in FY11, having a 26 percent share in overall foreign assistance. It’s been a downhill affair since.

The grant inflows have waned over the past decade in line with the reducing economic assistance from the United States. Frayed diplomatic relations since 2011 directly affected grant assistance, and during the Trump presidency the inflows sharply reduced. However, the US has still remained a major source of whatever non-debt official assistance has been flowing from the world into Pakistan in recent years. During FY21, US provided $108 million in grants, which is 43 percent of grants received during the year.

Meanwhile, foreign loans have swelled significantly, in line with requirements to finance external debt obligations. As per the EAD data, Pakistan’s foreign loans (from bilateral, multilateral and commercial sources) had grown by 35 percent year-on-year to reach an all-time high of $14 billion in FY21. Growing recourse to loans from foreign commercial banks has fueled the growth.

Considering Pakistan’s lofty external obligations, foreign grants will never be able to become a major source of financing, and Pakistan will have to keep incurring yet more loans to pay off old ones until exports and FDI step up in a major way. However, the grant inflows could do better, to ease the debt burden a little. Calculations based on data from the EAD show that back in FY11, foreign loans were 3 times of foreign grants received at the time. By FY21, the same loan/grant multiple had grown to 56!

Background discussions suggest that the federal and provincial governments have the potential to unlock significant grant-based foreign assistance in social sectors. The key is to design and market projects in a better way, negotiate skillfully for higher share of grant-based financing, create robust mechanisms for project implementation and evaluation to satisfy international development partners, and ensure seamless federal-provincial coordination to cut the red tape.

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