The Economic Affairs Division (EAD) has recommended the Finance Ministry to avoid heavy reliance on borrowing from foreign commercial banks at prevailing market rates for plugging fiscal as well as balance of payments gaps, as it is not only expensive but also had a very short maturity period.
Since July 2014 till December 2019, the country signed new agreements amounting to $60.914 billion with various financing partners.
The Policy Analysis and Development Wing of EAD conducted sectoral analysis of foreign economic assistance to provide insights of sectoral composition of foreign assistance received by the country from multiple sources during July 2014 to December 2019. The analysis is aimed at helping the stakeholders to prioritize foreign assistance and provide guidance to divert foreign assistance into those sectors where it is needed.
According to the EAD Wing from July 2014 to December 2019, the country signed $24.427 billion worth of financing agreements with multilaterals that constitutes 40 percent of the total commitments.
With bilaterals, $12.715 billion (21 percent) worth of new financing agreements were signed to finance development projects and implement structural and sectoral reforms. Disbursements under these agreements were made piecemeal over the period of 5 to 10 years depending upon the progress of the project/program activities. In addition, the government during the said period raised $16.272 billion (27 percent) from foreign commercial banks and $5 billion (8 percent) from international capital markets to support its balance of payments and budgetary requirements. The government also received $2.5 billion from China in the form of deposits to enhance its foreign exchange reserves. The EAD Policy Wing in its report stated that during the period under review $26.803 billion were committed for budgetary/balance of payments support. Around two-third of total commitments for this sector were committed by foreign commercial banks, followed by international capital market investors and from China in the form of deposits. In addition, Asian Development Bank and World Bank also helped the government to initiate structural and sectoral reform programs.
The sectoral analysis of foreign economic assistance revealed the points including, (i) about two-third of the total commitments were made by multilaterals and bilaterals; (ii) slightly lower than half of total commitments were made for budgetary support. Within the group, around two-third contributions were made by foreign commercial banks, one-fifth by international capital market investors and remaining by deposit made by SAFE Authority of China, ADB and World Bank; (iii) from multilateral and bilateral sources, one-fourth of total commitments were made in the transport and communication sector ($9.276 billion), one-fifth in commodity financing ($7.7 billion), followed by energy and power sector ($5.5 billion i.e.16 percent), governance, research and statistics (9 percent); (iv) despite the huge share of agriculture in the economy, only 4 percent of the new commitments were made for agriculture sector; (v) very limited commitments of foreign assistance were made for the social sectors, i.e. education (3 percent), health (1 percent), rural development and poverty reduction (4 percent); and (vi) portfolio of multilateral and bilateral development partners are also not diversified in terms of commitments made in various sectors of the economy as 87 percent of new commitments from China are for transport and communication sectors, while South Korea has projects only in health, transport, energy and science and technology sectors.
Based on these analyses the Policy Analysis and Development Wing framed policy recommendations for Ministry of Finance, Ministry of Planning, Development and Special Initiatives and EAD.
It stated that previously, heavy reliance was made to fill the fiscal as well as balance of payments gaps by borrowing from foreign commercial banks at prevailing market rates and recommended the Finance Ministry to avoid this practice as it is not only expensive but also has a very short maturity. It further recommended that in case of dire need, the gap may be filled by generating funds from international capital markets in the form of issuing Eurobond/Sukuk with longer maturity. The EAD Wing has observed that there is a need to amend guidelines for project management, 2008 for bringing clarity and fixing responsibility for the alignment of foreign funded projects with overall economic framework of the country. If it is the responsibility of Ministry of Planning, Development and Special Initiatives to ensure that the sectoral distribution of foreign funded projects are fair, equitable and align with the government priorities.