Asian Development Bank approves $1.3B loan for Pakistan

The Asian Development Bank (ADB) on Monday has signed an agreement with Pakistan for a loan worth $1.3 billion, the country's economy minister said.

Under the agreement, the bank will provide the loan to help stabilize the foreign exchange reserves of the country, Hammad Azhar tweeted after the signing ceremony.

"Economic Affairs Division and ADB have signed policy-based loans of USD 1.3 Bn today. The sums will be disbursed today and will help bolster reserves and strengthen our economic outlook," Azhar said.

On Friday, the bank said in a statement that the bank has approved a $300 million policy-based loan that will help Pakistan to address financial sustainability, governance, and energy infrastructure policy constraints in country's energy sector.

The financing will support the first of three subprograms, conventional generation, totaling $1 billion under the Energy Sector Reforms and Financial Sustainability Program, the statement added.

ADB supports Pakistan’s energy sector in three key areas, including conventional generation, power transmission, and, to a lesser extent, electricity distribution.

"The cash shortfall across the power supply chain in Pakistan, also known as circular debt, has shot up to more than $10 billion and is a longstanding chronic issue ailing the country’s power sector,” said ADB Director General for Central and West Asia Werner Liepach.

"A comprehensive and realistic Circular Debt Reduction Plan, assisted by the ADB in close coordination with other development partners, is the cornerstone of this subprogram. The plan aims to drastically cut the new flows of circular debt and provides policy directions on addressing accumulated circular debt," he added.

While Pakistan has made significant effort in recent years to expand its electricity generation capacity and stabilize supply, the country is yet to overcome the challenge of inefficiencies, distortions, and uneven reform progress in the sector.

These inefficiencies were estimated to have cost the country’s economy up to $18 billion, or 6.5% of gross domestic product, in 2015, the statement said.

The energy reform program aims to address the underlying causes of circular debt with a focus on improving inadequate tariff and subsidy systems, strengthening energy accounting, and reducing generation costs.

The ADB will finance the program with support from its development partners. The Export-Import Bank of Korea has confirmed it will provide $80 million in co-financing for the first subprogram.