The Asian Development Bank (ADB) will provide technical assistance (TA), worth $0.9 million, to increase debt sustainability and transparency in Pakistan.
According to official documents, the TA will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF 7), while the government will provide counterpart support in the form of counterpart staff, office accommodation, office supplies, secretarial assistance, domestic transportation, and other in-kind contributions.
The documents reveal that the proposed TA will promote increased sustainability and transparency in Pakistan’s borrowing practices. In order to support this objective, the TA rests on three interrelated outputs.
- To implement the Sustainable Development Finance Policy (SDFP)
- To strengthen fiscal risk management practices
- To strengthen public debt recording, management, and reporting.
The documents highlighted that ADB assesses Pakistan’s public debt as sustainable. However, it said that the macro-fiscal shocks, including changes in primary and fiscal deficits, real interest rate movements, and exchange rate depreciation, continue to pose a risk to debt sustainability in Pakistan.
ADB’s support for debt sustainability will be strengthened by alignment with the SDFP principles of the International Development Association (IDA). One of the pillars of SDFP is debt sustainability which creates additional incentives for countries to move toward sustainable development financing.
ADB’s SDFP seeks to improve debt transparency and debt management capacity in Pakistan linking specific reforms to future concessional resource allocations. Under the SDFP, ADB has promoted policy reforms that help mitigate the adverse effects of debt accumulation through improved macro-fiscal policy frameworks, strengthened domestic resource mobilization, more efficient spending of scarce fiscal resources through improved public financial management systems, and strengthened institutional capacity for debt management.
ADB is also monitoring IDA’s SDFP implementation in close collaboration with the government, IDA, and the International Monetary Fund.
During its first year of implementation, Pakistan managed to implement all but one policy action, leading it to set aside 10 percent of its concessional resource allocation from ADB.
To avoid future reductions in concessional resources available to Pakistan, the proposed TA will support the government with the identification and implementation of policy actions of the SDFP for the remainder of the Asian Development Fund-13 period, the documents state.
The documents further note that exposure to fiscal risks represents a significant threat to fiscal stability in Pakistan. The materialization of risks that are unaccounted for threatens the credibility of the medium-term budget framework. Failure to identify, mitigate, manage, and disclose exposure to fiscal risks results in unanticipated government liabilities which, in turn, threatens fiscal stability and debt sustainability.
To address this challenge, the proposed TA will support the development of an integrated fiscal risk management framework that can ensure adequate identification, mitigation, management, and disclosure of fiscal risks.
Identifying the sources of fiscal risk and assessing their size and likelihood of realization will allow the Finance Division to articulate adequate risk mitigation and risk management strategies under a comprehensive fiscal risk management strategy.
At the same time, continued disclosure of fiscal risks will ensure strengthened budget credibility through increased transparency, particularly for larger sources of fiscal risks such as public-private partnerships, state-owned enterprises, natural disasters, and macroeconomic risks.