Multilaterals and Pakistan

EDITORIAL: Visiting President of Asian Development Bank (ADB), Masato Kanda, expressed appreciation for Pakistan’s economic reforms and resilience, and commended the progress achieved in stabilising the economy and advancing structural reforms.

There is no doubt that ADB has emerged as a long-time development partner for Pakistan and many still recall the fact that it was the only multilateral that continued its assistance programme post-nuclear tests even when the others suspended assistance.

Traditionally, senior staff of multilaterals refrain from publicly criticising a borrowing member country though a sector or policy-specific issue even though these issues are noted by programme and project officers, which then are negotiated as conditions for a loan with the borrowing country.

Be that as it may, criticism by multilaterals is not welcomed by governments of member nations and in Pakistan’s case given that in 2024 we retained our standing as the largest borrower from ADB, the bank’s management may opt to be even more circumspect in expressing an unfavourable opinion.

Unlike China and India who are no longer eligible for concessional funding due to their having achieved a state of development, Pakistan at present is in no position to be able to access borrowing at rates cheaper than on offer by the multilaterals.

In addition, Pakistan has been informed in no uncertain terms that USD 16 billion rollovers provided by the three friendly countries would be suspended unless Pakistan is on an active International Monetary Fund (IMF) programme with its associated rigid monitoring mechanism. This very fact accounts for the ongoing IMF programme conditions, which are not only inflexible and extremely harsh but also upfront.

Multilaterals routinely coordinate amongst themselves with the objective of harmonizing their programme and projects for member countries to ensure that there is no duplication of effort and that the conditions are synchronised with one multilateral or another taking a lead in a sector. However, two disturbing factors are patently evident in the loans extended by multilaterals to Pakistan.

First, the design flaws due to the lack of knowledge of the multilaterals’ staff employed at headquarters lack of awareness of local conditions and this is apparent in the insistence by the IMF staff that the discount rate is a tool to control inflation. It is the Pakistani government that is by far the largest borrower from the commercial banking sector with the private sector borrowing no more than a fraction of total credit. The government does not reduce its expenditure as discount rate is raised and instead simply raises the mark-up component in the budget which in turn raises the budget deficit with implications on inflation.

And second, the focus of all multilaterals is on full-cost recovery, which can be supported; however, in Pakistan’s case it has meant passing on the sectoral inefficiencies, particularly in the power sector, onto the consumers with a devastating impact on productivity as well as on poverty levels.

Today, as per the World Bank, poverty in Pakistan is a high of 44.7 percent, a rate rivaling Sub-Saharan Africa’s. There is no doubt that all multilaterals fully support the Benazir Income Support Programme (BISP) and the proposal to merge all subsidies into BISP is to be supported.

However, fiscal space remains extremely narrow and the annual allocation for BISP is severely limited. With around 75 to 80 percent reliance on indirect taxes, whose incidence on the poor is greater than on the rich, a programme design must focus on arresting and then reversing the rising poverty levels through a cut in government expenditure rather than an increase in indirect tax collections.

Copyright Business Recorder, 2025