‘$300m loan moderately unsatisfactory’

ISLAMABAD: The Independent Evaluation Group (IEG) of the World Bank has declared $300 million programme loan for Pakistan under Finance for Growth as moderately unsatisfactory mainly because of political risks and macroeconomic instability.

The WB's IEG report states that the programme development objective of Pakistan Finance for Growth Development Policy Credit was to support the government's efforts "to promote an inclusive and transparent financial sector that was able to better intermediate resources including for long-term finance." The IEG in its detailed evaluation report stated that the outcome of the programme is assessed as “moderately unsatisfactory”.

The programme objective was highly relevant to the development priorities of Pakistan and highly aligned with the country partnership strategy of the Bank Group: part of a larger set of macroeconomic reforms, the operation was directed at addressing low savings and investment -- by broadening (increasing access to finance) and deepening (developing capital Political risk is substantial. Political risk could arise from (a) opposition by vested groups to institutional reforms, for example, to governance reform in the SOE-dominated insurance industry; (b) the absence of a majority by the ruling political party in the Upper House of parliament, which could weaken political commitment to reforms that support the macroeconomic framework; and, (c) an under-delivery by the provinces on their commitments to the budget parameters, which could also weaken the macroeconomic framework.

Macroeconomic risk is high. In its first review, in December 2019, of the current 39-month SDR 4.3 billion (US$6 billion) Extended Fund Facility for Pakistan (Pakistan requested and obtained approval of the new EFF in July 2019, after the previous EFF was completed in 2016), the IMF determined that while the programme "was on track and has started to bear fruit", the "risks to the [economic] outlook remained high". The risks include: (a) fiscal slippages that could undermine fiscal consolidation and put debt sustainability at risk; (b) lukewarm progress on structural reforms especially those strengthening governance of economic institutions that could result in stagnant economic activity; (c) a potential blacklisting by the FATF that could result in a freeze of capital flows and lower investment to Pakistan; and, (d) global economic shocks that could weaken economic activity and affect growth prospects and current account deficit projections.

The financial sector policy risks appear to have moderated, in view of recent progress with policy reform. On improving financial access: (a) the National Financial Inclusion Strategies (NFIS) targets have been made more ambitious, with ramped-up efforts at digitizing financial transactions; (b) the Financial Infrastructure and Inclusion Project is advancing the digitization agenda; and, (c) the Deposit Insurance Corporation is operational. On fostering long-term finance: the government and the Bank are building a capital market development program that focuses on the demand side in long-term finance, tackling issues pertaining to the bankability and profitability of infrastructure projects.

And, on improving transparency in the financial sector: (a) the rules and regulations to implement the Benami Transactions Prohibition Act were issued by the Federal Board of Revenue in March 2019; (b) the Mutual Evaluation Report of the AML/CFT regime was completed under the auspices of the FATF in October 2019; (c) the government started a program to register all outstanding prize bonds, and discontinued the issuance of the PKR 40,000 bond in February 2019 (over concerns with AML risk); and, (d) the government has placed the SLIC on the privatization list.

The Bank identified risks to the implementation of the reform plan and advanced mitigation measures. Political risk was considered high, and macroeconomic risk, substantial. To mitigate political risk, which could arise opposition by vested interests to the reform measures, the Bank recommended extensive consultations with various stakeholders and across political affiliations.

Implementing Agency Performance: The Ministry of Finance was the lead implementing agency, responsible for "overall oversight and implementation" of the operation.

Considering the satisfactory completion by parliament, the cabinet, the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, the Ministry of Finance, and the Ministry of Commerce of all the prior actions required for the effectiveness of the operation, the performance of the Ministry of Finance as lead implementing agency is deemed satisfactory.

Certain results, however, fell below target, and the Ministry of Finance, as lead implementing agency, could have worked better to attain the program targets. The Federal Board of Revenue did not issue the rules and regulations to implement the Benami Transactions Prohibition Act of 2017 until nine months after the program closing date, in March 2019; hence, there was no adjudication body for Benami transactions by the program closing date as planned. The positions of chairman and CEO of the SLIC remained one in mid-2018, hence, the government-owned insurer did not meet the "fit and proper" criteria for its managers as expected.