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The ADB approves a $1 billion “economic strategy”

The Asian Development Bank’s (ADB) Independent Evaluation Department (IED) has evaluated Pakistan’s $1 billion “Economic Stabilization Programme” as a success. According to the IED’s validation report, the one-billion-dollar special policy-based loan (SPBL) was intended to solve Pakistan’s acute macroeconomic situation in 2019.

On December 6, 2019, the ADB Board of Directors authorised the SPBL to aid in the implementation of the reform programme. The loan arrangement went into effect on December 9, 2019 and was completed on June 30, 2020, as planned. The ADB’s conventional capital resources were used to fund the $1 billion loan, which was completely disbursed.

The validation determines whether or not the programme was effective based on the following criteria:

I A programme design that is relevant. With Pakistan’s economy experiencing significant imbalances, the outcomes chain linked to policy steps to remedy them was credible, and preceding acts were effective in lessening the imbalances. Although the design programme was not revolutionary, the indicators assessed the important factors needed to begin the process of restoring balance. (ii) An effective rating based on the achievement of all SPBL result objectives and the fulfilment of all program-mandated policy activities, both in terms of achieving macroeconomic stability and structural adjustment. (iii) The software worked well.

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There were no meaningful delays in completing the policy actions and the design supported the EFF in accordance with country and ADB policy priorities. (iv) The programme was likely sustainable based on the Pakistan government’s ongoing commitment to reform although uncertainty remains as a result of the Covid-19 crisis.

The report noted that structural problems also contributed to macroeconomic imbalances, such as state-owned enterprises’ (SOEs) accumulated losses that resulted in an outstanding stock of SOE debt equivalent to four percent of GDP by the end of fiscal year 2018.

The SOEs in the power sector had low productivity and a lack of investment resulted in high system losses. Thus, the private sector’s competitiveness was negatively affected. Urgently needed reforms, such as increasing electricity tariffs and eliminating the government payment arrears backlog to energy companies had been neglected, all contributed to the crisis.

The International Monetary Fund (IMF) granted a loan under the Extended Fund Facility (EFF) amounting to SDR4,268 million (nearly $6 billion). The ADB supported it through a $1 billion loan and was part of a large rescue programme amounting to $38.6 billion over three years.

The ADB provided substantial support in preparing the EFF programme, utilising its history of policy engagement that had aided many sectors of Pakistan’s economy, in both its lending and technical assistance programmes.

The report noted that the ADB developed a comprehensive set of reforms with the IMF and the World Bank that would address the economy’s underlying imbalances. The reform programme was directed to, (i) strengthen exchange rate management, (ii) improve public financial management (PFM), and (iii) enhance existing social protection programmes to limit the social impact of the crisis.

The report noted that exchange rate management would be strengthened through the State Bank of Pakistan (SBP)’s adoption of a flexible market-based exchange rate policy that would allow for the build up of foreign exchange reserves.

The PFM would be improved by (i) passing new legislation with respect to managing public finances; (ii) setting fiscal targets to sustain fiscal consolidation; (iii) approving a budget reflecting the EFF’s fiscal targets; and (iv) strengthening the fiscal performance of SOEs, including (a) setting tariff adjustment targets for electricity and gas, (b) limiting sales tax exemptions, and (c) improving excise tax collections.

Social protection would be enhanced through more effective social cash transfers and developing a financial inclusion strategy for women. The PCR rated the programme highly relevant both at appraisal and at completion.

The rating was based on the urgent need to achieve a sustainable fiscal position and improved external imbalances. The objective remained highly relevant at closure. The PCR stated that although the conditions, with one exception, were part of the IMF’s programme, the ADB provided valuable inputs based on its knowledge of Pakistan.

The reform areas identified under the SPBL were considered to be relevant and consistent with Pakistan’s development objectives. The PCR stated that the programme’s three pillars supported sustained growth and provided a foundation for improved resource allocation and restored macroeconomic stability, while strengthening social protection to alleviate the impact of the crisis on the poor and vulnerable.

The programme’s results chain appeared to have been plausible. When the programme was designed, Pakistan’s economy had serious imbalances resulting from economic policies that were not aligned with economic fundamentals.

These included running large fiscal deficits, overly accommodating monetary policies, an exchange rate that was out of equilibrium, and poor debt management policies. Tax administration was weak, the business environment did not support investment and entrepreneurship, and the SOEs were inefficient and generated large losses that drained the budget.

Foreign exchange reserves fell to critically low levels. The EFF and the SPBL, in conjunction with other development partners, supported the rescue effort. The programme’s three pillars addressed these imbalances. Moving to an exchange rate policy would reduce the drain on international reserves, where the exchange rate changes in response to market forces to defend a disequilibrium exchange rate.

Improving PFM through more efficient tax collection, the closing of loopholes, and increasing electricity and gas tariffs to reduce the losses of SOEs in the energy sector limits the budget drain. However, the programme did not address the issue of arrears, nor the inefficient SOEs that were outside the energy sector.

The 11 prior actions under the SPBL were primarily the EFF prior actions, although policy measures were coordinated among development partners. Of the SPBL’s 11 policy actions, 10 consisted of EFF prior actions.

The additional action was that the Parliament would approve the Public Financial Management Law to improve the allocative efficiency of public resources.

The outcome indicators were (i) the current account deficit, as a percentage of GDP, would decline by at least two percentage points by FY2020 against a baseline deficit of 4.8percent of GDP in fiscal year 2019; (ii) the primary budget deficit, as a percentage of GDP, would be no more than 0.4percent by FY2020 against an FY2019 baseline of 3.5percent; (iii) the energy SOEs would generate an additional 150 billion Pakistan rupees (PRs) by FY2020 in revenue against a FY2019 baseline of PRs1,358 billion; and (iv) at least 90percent of Benazir Income Support Programme (BISP) beneficiaries received cash transfers by FY2020 through the biometric verification system against a 2018 baseline of 61 percent.

All the policy actions and outcome targets were fully achieved before the SPBL’s approval. The key policy actions supporting the programme were (i) moving to a flexible market determined exchange rate, (ii) a formal memorandum of understanding between all federal and provincial governments regarding fiscal targets that were consistent with the macroeconomic framework specified in the EFF, (iii) the approval of a budget consistent with the EFF targets, (iv) an automatic adjustment in electricity tariffs, (v) a comprehensive debt reduction plan for SOEs, (vi) the approval of a Financial Management Law for improved allocative efficiency of public resources, (vii) the passage of a law to eliminate legal authorization for executives to grant sales tax exemptions and concessions, (viii) the finalization of SBP’s banking contracts, and (ix) the launching of a financial inclusion strategy for women. The PCR reported that all these policy actions were fully achieved before the end of the 2019 calendar year.

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The PCR rated the SPBL efficient. When no economic internal rate of return could be calculated as was the case with PBLs and SPBLs, the rating was based on process efficiency of inputs resulting in the achievement of outputs and outcome, and whether the intended outcomes were achieved within the programme period.

In Pakistan SPBL’s case, the programme was prepared expeditiously despite the need to coordinate with a range of development partners. The PCR reported that in February 2021, the government agreed with the IMF on additional package of measures as part of the second to fifth reviews of the EFF that allowed for an immediate purchase equivalent to $500 million.

The IMF noted that the structural reform agenda continued to advance, including implementing energy sector reforms, and submitting a new SOE law to the Parliament and publishing of key SOE audits.

However, some well-advanced reforms were delayed including general sales tax reforms and the update of the BISP beneficiary’s database. The PCR incorporated some of the IMF’s analysis; however, it was more optimistic regarding sustainability.

In the EFF’s 2021 review, the IMF points out that although the Pakistan authorities have made substantial progress under the IMF’s EFF-supported programme, and policies have been at the centre of measures to support economic adjustment, “a second Covid-19 wave is unfolding, triggering exceptionally high uncertainty and downside risks.” Copyright Business Recorder, 2021

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