$16.6b of cheap project loans remain unutilised

ISLAMABAD: At a time when the government has embarked on a risky path of building foreign currency reserves by taking expensive loans, about $16.6 billion of relatively cheaper project loans have remained undisbursed despite the signing of contracts with lenders.

Some of these loans had not been disbursed due to long gestation periods of relevant projects whereas others remained unspent because of inefficiency, causing delay in release of funds by the lenders, said sources in the Economic Affairs Division.

$800m ADB loan for road network upgrade

Usually, the planned project completion period is three to four years except for hydel and nuclear power projects but government agencies take about seven to eight years.

Executing agencies like the Ministry of Power and National Highway Authority could be blamed for the delay in disbursement of most of these loans.

In four years since coming to power in mid-2013, the PML-N government could not address the bottlenecks that stopped the inflow of loans, which not only affected the pace of work but deprived the country of the benefits of relatively cheaper loans.

At the end of July 2017, the outstanding development project portfolio with 15 lenders stood at $29.7 billion, according to documents of the Ministry of Finance and Economic Affairs. Of this, multilateral and bilateral lenders disbursed $13.1 billion, leaving a balance of $16.6 billion, showed the documents.

Out of the $16.6 billion, three lenders – the World Bank, the Asian Development Bank and China – did not disburse $12.1 billion against the total contracted value of $20 billion.

China disbursed $4 billion out of $9 billion but these loans were mainly for projects that needed a long time. The ADB released only $1.9 billion against commitment of $5.8 billion. The World Bank disbursed $2 billion against total commitment of $5.3 billion.

Pakistan’s external debt and liabilities have swelled to $83 billion with a net addition of $22 billion in the past four years. Gross external borrowings in the past four years stood at $35 billion.

The borrowing cost of $16.6 billion is in the range of 1.25% to 2.5% and the loans will be returned in 19 to 30 years. This significantly reduces the risks of rollover and refinancing. But disbursements require progress on the development schemes.

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Most of the multilateral lenders imposed commitment charges on Pakistan for not utilising the outstanding balance, said the sources.

Finding it an easy solution to deep-rooted problems, the government embarked on a dangerous path of taking conventional and non-conventional loans to prop up official foreign currency reserves and meet its external requirements.

The Ministry of Finance is again in the process of hiring financial advisers to issue Sukuk and Eurobonds before the end of current calendar year. It plans to borrow a minimum of $1 to $2 billion to provide cushion to the reserves.

The huge borrowings in the past four years have helped the government increase its reserves to $19 billion compared to $6 billion in June 2013. However, the reserves were again on the sliding path and stood at $14.1 billion on October 13, 2017.

In the past three months, the government took $703 million in fresh short-term commercial loans to support the reserves.

In its four years, the government borrowed $10.8 billion from commercial banks and international debt markets. It floated $4.5 billion worth of Sukuk and Eurobonds and acquired $6.3 billion from commercial banks till June 2017.

Cost of borrowing

The government took commercial loans at interest rates ranging from 3.96% to over 5%. Most of these loans have been obtained for less than one year while some, mainly from Chinese banks, are for two to three years.

Sukuk and Eurobonds have been floated for five to ten years with returns ranging from 5.75% to 8.25%.

Ministry of Finance sources said project loans could not completely meet the government’s cash requirement as about 65% of the loans were meant for the import of capital goods.

They said efforts had been stepped up to take benefit of cheaper financing and in the first quarter $538 million in project loans were disbursed.

Published in The Express Tribune, October 22nd, 2017.

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