EDITORIAL: Federal Finance Minister Ishaq Dar tweeted approval of co-financing to the tune of 500 million dollars by the Asian Infrastructure Investment Bank (AIIB) – funds that he stated would be received by the State Bank of Pakistan this month. This amount is earmarked for BRACE (Building Resilience with Active Countercyclical Expenditures), an Asian Development Bank programme designed to counter social fallout of economic crises.
The ADB website notes that on 21 October 2022 1.5 billion dollars was approved for Pakistan under BRACE initiative to “provide social protection, promote food security, and support employment for its people amid devastating floods and global supply disruptions” – an amount that would help fund the government’s 2.3 billion dollars countercyclical development expenditure programme designed to cushion the impacts of external shocks including the Russian invasion of Ukraine.
ADB further notes that this financing would “provide the fiscal space needed for the government to implement its counter-cyclical development expenditure package, “which is designed to target the poorest families in Pakistan who are often disproportionately affected in times of crisis.
ADB’s assistance will help to expand the number of families receiving cash transfers from 7.9 million to 9 million, increase the number of children enrolled in primary and secondary schools, and enhance geographic coverage of health services and nutritional supplies for pregnant and lactating mothers and children under 2 years old… The government’s support includes specific measures to promote gender empowerment and climate change adaptation, which have become even more important in light of the recent floods.” And what is significant is that ADB notes that BRACE will help the government deal with the impact of external shocks “while in parallel, (the government) continue the structural reforms that are necessary to improve the country’s medium- to long-term macroeconomic prospects.”
Two observations on BRACE assistance are necessary. First, only 250 million dollars of the ADB loan is concessional while 1.25 billion dollars is a regular loan (Ordinary Capital Resources) while AIIB has yet to update the terms of the agreed co-financing on its website – a key piece of information that the finance minister did not share with the people of this country.
And secondly, the 1.5 billion dollars approved by ADB and the 500 million dollars by AIIB is still 300 million dollars short of the government’s 2.3 billion-dollar cyclical development expenditure programme. It is unclear whether this shortfall has already been met from other multilaterals/bilaterals or is still being proactively sought.
While money, no doubt, is fungible and with foreign exchange reserves at 8.9812 billion dollars as of 28 October, barely enough for less than 1.5 months of imports, the government must not lose sight of the fact that this money is specifically earmarked for the poor and care must be taken not to appropriate the fiscal space thus created for subsidies to the rich and influential that include subsidizing electricity to the five export-oriented sectors estimated to cost over 100 billion rupees to the taxpayers.
The project documents also stipulate that an independent third-party survey of the beneficiaries of the CDEP (Countercyclical Development Expenditure Programme) will be conducted 3 months after programme completion in June 2023.
Thus the days when dedicated funds could be shifted to other sectors with few consequences are long gone and in this context the ADB project document on BRACE warns that “the IMF and ADB debt sustainability analyses conclude that Pakistan’s public and external debts are projected to remain sustainable against the backdrop of policy reforms and fiscal adjustments envisaged under the 2019 EFF” – or in short the policy reforms, if abandoned, would account for a cessation of inflows that would lead to unsustainable public and external debt.
Copyright Business Recorder, 2022
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