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Pakistan prefers grant aid over pure loans

ISLAMABAD — Pakistan government has decided to seek only grant aid rather than pure loans, out of roughly $6 billion assistance pledged by the international donors and Pakistan's bilateral creditors with a view to lessen the piling of foreign debt.

Informed sources said that although $1.9 billion had been pledged by the donors as grant assistance, the remaining over $4 billion, if not offered on concessional 0.5 per cent interest rate or a service charge, the already vulnerable debt sustainability could cause problems to the country.

The Officials of the Economic Affairs Division (EAD) are expected to start holding meetings with each donor and a country from early December to discuss the amount of interest rate to be attached with the financial assistance being offered for reconstruction and rehabilitation activities in Azad Kashmir and NWFP.

"If we get the remaining $4 billion assistance on 0.5 per cent interest rate for 40 years with 10 years grace period then this would be a best option otherwise we might get into a debt trap", a source warned.

The government, he said, was not likely to opt for $375 million loan offered by the IMF as it would not be without strings and harsh conditionalities.

According to a latest official document made available to this correspondent, for Pakistan expanding market access and ensuring debt sustainability was an important indicator of global cooperation.

However, enhanced levels of Official Development Assistance (ODA) at concessionary terms along with its effective utilisation will no doubt speed-up the momentum towards achieving the desired goals.

"Not only the terms of bilateral foreign aid to Pakistan are stringent, the grant element has also declined significantly over

the years, thus impacting on the country's capacity to service external debt", the document said.

Most of the recent increase in foreign aid, it added, did not necessarily provide a new source of financing for social services or poverty reduction, as it was a reverse flow for payment of principal and debt servicing of past loans.

Similarly, emergency and disaster relief, although much needed, did not address long term development needs.

Due to higher exports, a large increase in the inflow of remittances, the receipt of grant assistance and inflow of foreign direct investment (FDI), foreign exchange reserves have risen to approximately $13 billion and the government has been able to pre-pay $1.7 billion of the expense external debt.

These development helped Pakistan entire into the capital market by issuing Erurobond as well as Islamic bond (Sukuk) worth $500 million and $600 million, respectively.

External debt and liabilities has declined by $2.072 billion — from $37.92 billion in the year1999 to $36.92 billion in mid 2004, the document has recorded.