ISLAMABAD: The Independent Evaluation Department (IED) of the Asian Development Bank (AfDB) has evaluated the âEconomic Stabilization Programâ worth $ 1 billion for Pakistan as a success.
The IED in its validation report said that the $ 1 billion Special Policy-Based Loan (SPBL) was aimed at addressing Pakistan’s severe macroeconomic crisis in 2019.
To support the implementation of the reform program, the AfDB Board of Directors approved the SPBL on December 6, 2019. The loan agreement entered into force on December 9, 2019 and was closed as scheduled on June 30, 2019. 2020. The $ 1 billion loan funded by capital resources has been fully disbursed.
The validation assesses the program as successful based on the following:
(i) Relevant program design. With the Pakistani economy experiencing serious imbalances, the chain of results linked to policy measures to correct them was plausible and prior actions were effectively aimed at reducing the imbalances. The indicators measured the key variables needed to begin to restore balance, even if the design program was not innovative. (ii) An effective rating based on the achievement of all SPBL performance targets and the completion of all policy actions required under the program, both with regard to progress towards macroeconomic stability and structural adjustment. (iii) The program was effective.
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There were no significant delays in the completion of policy actions and the design supported the EFF in line with the political priorities of the country and the ADB. (iv) The program was likely viable based on the Pakistani government’s continued commitment to reform, although uncertainty persists due to the Covid-19 crisis.
The report notes that structural problems have also contributed to macroeconomic imbalances, such as accumulated losses by state-owned enterprises (SOEs) which have resulted in an outstanding debt of state-owned enterprises equivalent to four percent of GDP at the end of the 2018 financial year.
State-owned enterprises in the electricity sector had low productivity and a lack of investment resulted in high system losses. Thus, the competitiveness of the private sector has been negatively affected. Urgent reforms, such as increasing electricity tariffs and eliminating the government’s payment arrears to energy companies, have been overlooked, all of which have contributed to the crisis.
The International Monetary Fund (IMF) provided a loan under the Fund’s Extended Facility (EFF) in the amount of SDR 4,268 million (nearly $ 6 billion). The AfDB supported it with a $ 1 billion loan and was part of a large three-year $ 38.6 billion bailout program.
The AfDB provided substantial support to the preparation of the EFF program, using its history of political engagement which had helped many sectors of the Pakistani economy, both in its lending and technical assistance programs.
The report noted that the AfDB has worked out a comprehensive reform package with the IMF and the World Bank to address the underlying imbalances in the economy. The reform program aimed to (i) strengthen exchange rate management, (ii) improve public finance management (PFM) and (iii) strengthen existing social protection programs to limit the social impact of the crisis.
The report noted that the management of exchange rates would be strengthened by the adoption by the State Bank of Pakistan (SBP) of a flexible market-based exchange rate policy that would allow the build-up of foreign exchange reserves.
PFM would be improved by (i) adopting new legislation on public finance management; (ii) set fiscal targets to support fiscal consolidation; (iii) approval of a budget reflecting the budgetary objectives of the EFF; and (iv) strengthening the fiscal performance of public enterprises, in particular (a) setting tariff adjustment targets for electricity and gas, (b) limiting sales tax exemptions and (c) improving the collection of excise duties.
Social protection would be strengthened through more effective social cash transfers and the development of a financial inclusion strategy for women. The PCR found the program to be highly relevant both at appraisal and at completion.
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The rating was based on the urgent need to achieve a sustainable fiscal position and improve external imbalances. The objective remained very relevant at the close. The PCR indicated that although the conditions, with one exception, were part of the IMF’s program, the ADB provided valuable contributions based on its knowledge of Pakistan.
The areas of reform identified under the SPBL were considered relevant and consistent with Pakistan’s development objectives. The PCR indicated that the three pillars of the program supported sustained growth and laid the groundwork for better allocation of resources and the restoration of macroeconomic stability, while strengthening social protection to mitigate the impact of the crisis on the poor and the vulnerable.
The program’s results chain appears to have been plausible. When the program was designed, the Pakistani economy suffered from serious imbalances resulting from economic policies that were not aligned with economic fundamentals.
These included large budget deficits, overly accommodating monetary policies, an out of balance exchange rate and poor debt management policies. Tax administration was weak, the business environment did not support investment and entrepreneurship, and state-owned enterprises were inefficient and generated large losses that drained the budget.
Foreign exchange reserves have fallen to extremely low levels. EFF and SPBL, in collaboration with other development partners, supported the rescue effort. The three pillars of the program made it possible to remedy these imbalances. Switching to an exchange rate policy would reduce the drain on international reserves, where the exchange rate changes in response to market forces to defend an exchange rate from imbalance.
Improving PFM through more efficient tax collection, closing loopholes and increasing electricity and gas tariffs to reduce losses of SOEs in the energy sector limits the fiscal drain. However, the program did not address the issue of arrears, nor inefficient public enterprises that were outside the energy sector.
The 11 prior actions under the SPBL were mainly the prior actions of the EFF, although the policy measures were coordinated among the development partners. Of the 11 political actions of the SPBL, 10 were prior actions of the EFF.
The further action was that the Parliament would approve the Public Financial Management Law in order to improve the efficiency of the allocation of public resources.
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The outcome indicators were (i) the current account deficit, as a percentage of GDP, would decrease by at least two percentage points by FY2020 from a baseline deficit of 4.8% of GDP for fiscal year 2019; (ii) the primary budget deficit, as a percentage of GDP, would not exceed 0.4% by fiscal year 2020 against a benchmark of 3.5% for fiscal year 2019; (iii) public energy companies would generate an additional 150 billion Pakistani rupees (PR) by FY 2020 compared to a baseline for FY 2019 of 1.358 billion rupees; and (iv) at least 90 percent of Benazir Income Support Program (BISP) beneficiaries received cash transfers by FY2020 through the biometric verification system against a 2018 benchmark of 61 for hundred.
All political actions and results targets were fully achieved prior to SPBL approval. The key policy measures supporting the program were (i) the shift 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 framework. macroeconomic specified in the EFF, (iii) approval of a budget in line with the objectives of the EFF, (iv) automatic adjustment of electricity tariffs, (v) an overall plan to reduce the debt of public enterprises, (vi) the approval of a financial management law for better resource efficiency, (vii) the adoption of a law removing the legal authorization for executives to grant sales tax exemptions and reductions, (viii) finalization of SBP banking contracts, and (ix) launch of a financial inclusion strategy for women. The RAP reported that all of these political actions were fully completed by the end of calendar year 2019.
The PCR evaluated the effective SPBL. When no internal economic rate of return could be calculated, as was the case for PBLs and SPBLs, the rating was based on the efficiency of the input process leading to the achievement of outputs and outcomes, and whether the expected results had been achieved during the program period.
In the case of Pakistan SPBL, the program was prepared quickly despite the need to coordinate with a range of development partners.
The PCR said that in February 2021, the government had agreed with the IMF on a set of additional measures as part of the second to fifth reviews of the EFF that resulted in an immediate purchase equivalent to $ 500 million. .
The IMF noted that the structural reform agenda continues to progress, including the implementation of energy sector reforms, the submission of a new law on state-owned enterprises to Parliament, and the publication of major audits of state-owned enterprises. .
However, some well-advanced reforms have been delayed, including general sales tax reforms and updating the database of BISP beneficiaries.
The PCR incorporated part of the IMF’s analysis; however, he was more optimistic about sustainability.
In the 2021 EFF review, the IMF stresses that although the Pakistani authorities have made substantial progress under the IMF’s EFF-supported program and that policies have been at the center of adjustment support measures. economic, “a second wave of Covid-19 is unfolding, triggering uncertainty and unusually high downside risks.”
Copyright Business Recorder, 2021