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PR Short Notes


Photo Source: Dawn

Pakistan Reader# 524, 18 January 2023

Foreign assistance and loans: Is the trust deficit spoiling Pakistan’s case?



The mode of financing indicates that foreign economic assistance will remain a stop-gap measure for stabilising reserves and growth in the short term

Ankit Singh

On 4 January, current finance minister Ishaq Dar asserted that Saudi Arabia and China would beef up the shortage of forex reserves. In the hopes of not facing a default, friendly countries like China and Saudi Arabia have witnessed visits from Pakistan Army Chiefs to Prime Minister in the same regard. On 12 January, foreign exchange reserves held by the State Bank of Pakistan (SBP) dropped to USD 4.34 billion, the lowest since February 2014. As per the data available on the SBP website, net forex reserve as of 6 January stood at USD 10.187 billion, including forex reserves amounting to USD 5.8 billion held by private banks. Despite, import restrictions, the forex reserves have seen a fall in the last six months due to external debt servicing. Foreign economic assistance from Saudi Arabia, and China has gathered volume in the last decade and there is a need to understand how external assistance or loans are utilized by Pakistani authorities.

The foreign economic assistance in FY21-22
According to the Ministry of Economic Affairs (MEA), foreign economic assistance can be defined as “government aid designed to promote the economic development and welfare of developing countries.” As per the latest annual report on foreign economic assistance by MEA, the government of Pakistan committed to new agreements worth USD 15.722 billion. While the disbursement amount stood at USD 16.974 through multilateral and bilateral partners, China was the biggest contributor in FY 2021-22 and the energy sector captured the biggest share the foreign assistance up to 26 per cent. While USD 4.6 billion were received through Roshan Digital Accounts and USD one billion tranches from IMF took the new commitment by the Pakistan government to around USD 22 billion. Out of the USD 15.7 billion in the new commitments, USD 2.4 billion were promised by bilateral development partners. China committed new assistance of up to USD 1.012 billion.  Other than loans, the government also got a commitment for different oil payment facilities from the Saudi Fund for Development (SFD) of up to USD three billion.

Sectoral-wise composition of new commitments
According to the annual report, commitment in technology had the giant share of 40 per cent, followed by Covid-19 (22 per cent), the energy/power sector (18 per cent), the water sector (seven per cent), education and training; and social welfare (both at six per cent), while nutrition got only one per cent of the commitments. Foreign economic assistance is mode-based financing into the respective sectors. Budgetary support and Balance of payment have been the biggest modes in which the disbursements have been utilised (60 per cent), while project financing mode stood at 21 per cent and program and commodity financing each stood at 10 per cent.

While the disbursed loans or concessionary grants are allotted for ongoing projects of the government. There has been a demand from countries like Saudi Arabia and UAE to direct their new loan commitments to avenues of common interest like refineries or gas ports. The deficit which Pakistan faces is not of the reserves but rather of the trust and the behaviour of friendly countries is a symptom of that trust deficit.

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