Pakistan economic crisis: Cash-strapped country secures a critical $655 million loan

Cash-strapped Pakistan recently secured a significant financing package of USD 655 million from the Asian Development Bank (ADB), a move swiftly taken after Finance Minister Shamshad Akhtar declared the nation's public debt as "unsustainable."

The ADB's funding includes three distinct loans: USD 300 million for enhancing domestic resource mobilization, USD 275 million to rehabilitate schools damaged during the destructive August 2022 floods, and USD 80 million to bolster agricultural productivity for improved food security, as announced by the ADB.

Debt Dilemma: Contradictory Views on Pakistan's Sustainability

In tandem, the World Bank's Debt Management and Sustainability Mission held discussions with Finance Minister Akhtar to assess the country's debt management, a report by the Express Tribune stated.

Despite Akhtar's assertion of Pakistan's debt being "unsustainable," World Bank Vice President for South Asia Martin Raiser contradicted this view, labeling the debt as "sustainable." Notably, the ADB is footing the salaries of half of Pakistan's Debt Management Office staff—a responsibility ideally borne by the country's finance ministry.

However, despite concerns about unsustainable debt, Pakistan pursued one of the expensive loans offered by multilateral lenders, often known for providing financing at concessional rates.

Loan Dynamics: Balancing Expensive ADB Funding with Shorter Terms

The USD 300 million loan, spanning 15 years with a three-year grace period, employs ADB's Flexible Loan Product, incurring an interest rate pegged to market fluctuations. At current market rates, Pakistan faces an interest cost exceeding 6%, nearly three times higher than the concessional lending rates by the World Bank and the ADB.

Furthermore, the loan's 15-year term is comparatively shorter than previous ADB financing, raising questions about Pakistan's increasing debt burden for ventures that could potentially be addressed through internal initiatives rather than relying on foreign aid.

Notably, the ADB's intervention aims to strengthen Pakistan's tax system and address challenges such as a complex tax structure, a high level of informality in the economy, and weak tax administration, factors contributing to the nation's relatively weak tax revenue performance compared to regional counterparts.