Pakistan to Get $75M from The Asian Development Bank

The Asian Development Bank (ADB) will provide Pakistan with $75 million in loans to build several multipurpose dams, irrigation canals and drinking water supplies across the Potohar Plateau near Islamabad.

The project will improve the livelihoods of about 22,000 farming households by bringing irrigation to 11,500 hectares of agricultural land that used to rely on irregular and unpredictable rainfall, as well as improving existing irrigation networks across another 10,000 hectares.

The project will also increase supplies of water for domestic use to rural communities and small towns in Punjab province’s districts of Attock, Rawalpindi, Jhelum, and Chakwal.

“Without secure water sources, farming in rain-fed ‘barani’ areas usually has low productivity and carries high risk because crops often fail when there is drought,” said Arnaud Cauchois, Rural Development Specialist at ADB. “Barani” is a term used in Pakistan to refer to agricultural areas dependent on rain.

“This project will give farmers a reliable water supply, which will increase crop and livestock productivity and therefore increase people’s incomes. At the same time, it will increase households’ access to cleaner water, therefore reducing sickness and mortality rates caused by waterborne diseases.”

The construction of dams across the Potohar Plateau started as early as the 1960s. But they were not as beneficial as had been hoped because local communities rarely participated in their development, farmers did not get the financial and technical support necessary to switch from rain-fed agriculture to irrigated farming, and there was no watershed management resulting in a high reservoir sedimentation rate.

In this new project, a more holistic approach is being used that is simultaneously looking at upstream watershed management and downstream irrigated area development. It will also involve local communities to ensure the project is demand driven.

Farming is the traditional source of livelihoods across Pothowar, but crop yields in the “barani” areas have been typically less than half those in areas with river-fed irrigation. The traditional crops are wheat and gram in winter and sorghum, millet, groundnuts or maize in summer when rainfall is sufficient.

Out of the total loan package, $20 million will be concessional and will carry low interest rates, while the balance of $55 million will be provided from ordinary capital resources under ADB’s London interbank offered rate-based lending facility.

Pakistan does not need loan in fiscal year 2008-09

Though high oil prices have depleted Pakistan's foreign exchange reserves to levels worth less than three months of imports, Pakistan does not need loan in fiscal year 2008-09 from the International Monetary Fund (IMF) for money in the next 10 months if the government cuts spending and gets other sources of funding to offset falling reserves, a senior IMF official said. Mohsin Khan, IMF's director for the Middle East and Central Asia, said Pakistan had not asked the IMF for loans.

He said Pakistan would not need an IMF loan in the fiscal year to June if the government abolishes all fuel subsidies by December as planned, and stops borrowing from the central bank to pay for its budget deficit. High oil prices have depleted Pakistan's foreign exchange reserves to levels worth less than three months of imports, sparking alarm among investors that Pakistan may need to take up loans from the IMF to pay for imports.

Khan said the government needs to stick to its privatisation plans to raise money, secure over $1 billion worth of loans from the World Bank and the Asian Development Bank, and get Saudi Arabia to defer an estimated $5.9 billion worth of oil payments.

"If things fall right for them in all these things that they are planning to do, I don't believe there will be any need for them to come to the IMF," Khan, who was in Pakistan this week, said in a phone interview.

"Unless there is a total collapse of foreign direct investments, they can ride this out," he said.

Pakistan, a repeat customer of the IMF, last took an IMF loan worth $1.3 billion in 2001 to help fight poverty and offset the effects of a regional war on the economy. Backing for the loan was helped by Pakistan's support for the US war on terrorism.

Pakistan's economy is going through its toughest period after six years of healthy growth. It is wrestling widening trade and fiscal deficits, soaring inflation, and dwindling investor confidence battered by the country's political tensions.

There is mounting speculation President Pervez Musharraf would quit after the coalition government said last week it planned to impeach him. The political turmoil has unnerved investors - Pakistani stocks are near two-year lows, while the Pakistan rupee has lost nearly a quarter of its value this year.

ACCUMULATE RESERVES:

Khan, who is from Pakistan and has been at the IMF for 36 years, said it is the responsibility of the State Bank of Pakistan (SBP), Pakistan's central bank, to boost reserves.

"You must build up your reserves back to where they were a year ago. Get back to that level, at the very least, and aim higher," he said. Khan said the central bank should ensure any future loans Pakistan receives will add to reserves, and that it should ask commercial banks to raise deposit rates by at least 2 percent to attract more money from investors.

However, he said the central bank does not need to raise its key discount rate from the current 13 percent because markets will ensure that the yields for treasury bills sold by the SBP are above the discount rate.

Pakistan's foreign exchange reserves fell $797 million in July, the first month of fiscal year 2008/09. They have plummeted 40 percent from a record $16.5 billion in October last year. Khan said the central bank was doing "exactly the right thing" by not selling dollars from its reserves to support the falling rupee.

"If the State Bank starts to lose reserves by defending a currency that is not defensible, then it will be ridiculous. They will really be shooting themselves in the foot for that," he said. "Don't fight the market. So many countries have run into serious problems by trying to defend the exchange rate when the market is saying that's not the exchange rate we like."