In the middle of a serious economic crisis, the World Bank has cancelled or withheld a $335 million concessionary loan quota for Pakistan after Islamabad failed to empower the debt office and could not harmonise the sales tax and property valuation procedures.
The Washington-based lender’s decision has put a question mark over the ability of Pakistani policymakers and bureaucrats, who have not been able to take corrective measures and lost claim over the cheaper loans.
Yet the finance minister approached the US for help to expedite the policy loan approvals despite his ministry’s failure to implement the required conditions.
Official documents showed that the World Bank cancelled an allocation of $188 million for Pakistan for the just-ended fiscal year.
The lender withheld another $147 million quota that it otherwise would have allocated in the new fiscal year, had Pakistan been able to meet the agreed conditions, according to the documents.
The development has taken place at a time when the country is not able to access the international capital markets and the foreign commercial banks for getting loans due to the deteriorating economic conditions. In such conditions, the lender cancelled the loans that carried only 2% interest rate and had a 30-year repayment period.
The International Development Association (IDA) – a concessionary arm of the World Bank – had introduced the new Sustainable Development Finance Policy (SDFP) from July 2020 as part of the international community’s efforts to help IDA countries manage the rising public debt vulnerabilities and risks.
To draw these concessionary resources, every country has to implement at least three performance and policy actions, known as PPAs, under the SDFP framework.
“Given the unsatisfactory implementation of the carry-over FY21 PPAs in FY22, the 10% set-aside that was applied to Pakistan’s country allocation for FY22 will be discounted and permanently lost,” the World Bank recently informed Pakistan. As a result, the fiscal year 2021-22 IDA loan allocation of $1.88 billion has been cut by $188 million.
Documents showed that the Finance Division could not issue the administrative rules for assigning all debt management functions to the debt management office. The responsibilities had to be transferred following amendments to the 2005 Fiscal Responsibility and Debt Limitation Act (FRDLA).
At present, a grade-20 officer of the audit and account service is running the debt office.
Similarly, the federal and provincial governments failed to finalise regulations for the integration and harmonisation of general sales tax (GST) laws and procedures.
Last week, Finance Minister Miftah Ismail met with US Ambassador Donald Blome, seeking his help to unlock $950 million worth of funds from the World Bank. The minister requested the ambassador to convince the World Bank to approve two budget support loans. However, the approval of these loans requires implementation of the prior actions related to GST harmonisation and property valuations.
Documents showed that due to the unsatisfactory implementation of fiscal year 2022 prior actions, the World Bank also set aside another 10% of Pakistan’s quota for this fiscal year. For fiscal year 2022-23, the IDA loan allocation is $1.47 billion and as a result of the decision, the World Bank has withheld $147 million loan quota due to the failure to meet conditions.
The bank withheld $147 million due to the inability of the Federal Board of Revenue (FBR) and the provincial Boards of Revenue to agree on consensus property valuation tables. The provincial governments are sticking to their valuation tables and the FBR to its own valuations. But the World Bank wants the District Collectorate valuation tables to be at least equal to 85% of the market values of these properties.
The bank said that Pakistan could recover the set-aside quota of $147 million in July next year subject to increasing property valuation rates to 85% of the market prices of properties.
In case, Pakistan fails to rationalise the property valuation rates, the country will permanently lose $147 million too, like it has already lost $188 million, the World Bank warned. Due to the withholding of $147 million, Pakistan’s concessionary loan quota has been reduced to $1.32 billion for this fiscal year, according to the documents.
The World Bank said that the IDA management had the documentary evidence that Pakistan did not meet these conditions.
It further said that in order to avail the remaining quota, Pakistan would have to implement four prior conditions. These relate to the fiscal policy unit, which is also in limbo, a debt report by the Debt Policy Office and approval of medium-term budgetary frameworks by the federal and provincial governments.
The property valuation table is the pending condition that also has to be implemented.
Pakistan is in dire need of these funds, as these are part of the overall $31 billion projected available financing as against the total requirement of $35.1 billion. Any shortfall will further complicate Pakistan’s case in the eyes of the IMF.
“Reflecting incomplete implementation of performance and policy actions (PPAs) for FY21 under the World Bank Sustainable Development Financing Policy, SDR132 million, or around US$188 million, has been permanently discounted from Pakistan’s IDA allocation,” confirmed World Bank’s spokeswoman to The Express Tribune.
She added that because of delayed implementation of FY22 PPAs, a 10% set-aside will also be applied to Pakistan’s country allocation for FY23, which is estimated to be about SDR 103 million (set-aside of around $147 million).
Pakistan can recover this set-aside at the beginning of FY24 upon satisfactory implementation of outstanding PPAs. But if implementation of the FY22 PPAs in FY23 remains incomplete, this amount will also be permanently discounted, said the spokeswoman.
Published in The Express Tribune, August 5th, 2022.