From YOUSAF RAFIQ
Special Correspondent, Islamabad
Nov 29 - Dec 05, 1999

ECC gives recommendations

The Economic Coordination Committee of the Cabinet in its meeting held on September 13, 1999 considered Pakistan Poverty Alleviation Fund Project — Relending Terms. The ECC appointed a committee to determine within the framework of the agreement signed with the World Bank, the parameters for on-lending the funds to the ultimate beneficiaries on a reasonable rate with mandatory regional distribution.

After deliberations, the committee has given the following recommendations: (i) The rate of interest should not be more than the rate of interest charged by the Commercial Banks on loans. A cap on the high rate of interest charged by Partner Organizations (POs) to the ultimate borrower is necessary to safeguard the poor. The Pakistan Poverty Alleviation Fund Company (PPAFC) may impose 16 per cent maximum lending rate to the ultimate beneficiaries. Charging a higher rate of interest from the poor will carry political cost to the government. (ii) The POs intermediation cost, including bad debts and funding, on the average be fixed at 8 per cent. (iii) Since the PPAFC will re-lend credit to well established POs; the risk of loan loss should be negligible. The Committee has found no justification for the proposed default rate of 3 per cent on account of loan loss and recommends that this may be reduced to less than 1 per cent. Also, it is necessary to reduce the proposed operational cost of PPAFC. (iv) Allowing PPAFC 1.25 per cent IDA charges, 3.25 per cent for operational expenses and provision for bad loans of 1 per cent the margin of 2.5 per cent available to PPAFC (8 per cent-5.5 per cent) should be used with the approval of the government. (v) The PPAFC should ensure regional balance in the allocation of credit.

The World Bank and the Government of Pakistan have entered into an agreement on July 7, 1999 for International Development Association (IDA) program assistance of SDR 66.5 million. The main objective of the program assistance is to alleviate poverty, and to increase incomes of the poor households by providing loans and technical assistance, increasing access of the poor to physical infrastructure and enhancing institutional capacity of NGOs and Community Organizations. The Pakistan Poverty Alleviation Fund Company (PPAFC) will be responsible for implementation of the program.

Under the program, the World Bank has agreed to extend a multi currency loan equivalent to SDR 66.5 million to Government of Pakistan. The loan is for a period of 34 years (inclusive a grace period of 10 years). The bank will not charge any interest on the loan but will receive a commitment fee on the principal amount not withdrawn at the rate not exceeding one half of one per cent per annum. The bank will also charge a service fee at the rate of three forth of one per cent per annum on the principal amount. The Credit Agreement

will become effective upon signing of Subsidiary Loan Agreement between Government of Pakistan and PPAFC. The closing date of the Credit Agreement is December 31, 2004.

The foreign currency available under the loan will be used to cushion GOP's foreign currency reserves. A part of the loan proceeds (equivalent SDR 33.2 million) will be passed on to PPAF as a loan to be repaid in 23 years including a grace period of 8 years. The PPAF shall pay GoP interest at the rate of three-forth of one per cent per annum on the principal amount of credit withdrawn and outstanding. PPAF shall also pay GoP commitment fee on the principal amount of the credit not withdrawn at the rate not exceeding one half of one per cent. The remaining amount of proceeds of the loan equivalent SDR 33.3 million will be passed on to PPAF as a grant on non-reimbursable basis. A major portion of grant (SDR 20 million) will be spent through POs/COs on small scale community infrastructure development projects as karezes, small dams, water courses, link roads, bridges, wells and tube-wells etc.

The sources say that the proposed relending terms of the proceeds of the loan to PPAFC widely deviate from the Standard Relending Terms of the GOP. The Standard Terms of the Government entail that the GoP will charge interest rate of 8 per cent and additional 6 per cent will be charged on account of exchange risk fee and that maximum relending rate for the final borrower will be 17 per cent inclusive of exchange risk fee. The Standard Terms further state that the maximum period of the loan shall be 15 years including a grace period of 2 years.

According to the Ministry of Finance, the PPAFC is a major initiative of the GOP, assisted by IDA of the World Bank, for eradication of poverty in the country. The IDA credit is interest free long tenure facility that will also augment foreign currency reserves of the Government of Pakistan. Therefore, the Government may like to be flexible in relending terms of the proceeds of the loan.

The objective of the project is to alleviate poverty by improving the access of the rural and urban poor to economic resources and services. The project will take care of the financing of micro-projects to support income generating activities, including agriculture and livestock development, off-farm activities and micro-enterprises; and small scale community infrastructure development projects, including the development, construction and for improvement of karezes (indigenous irrigation channels), other irrigation channels, small dams, water courses, land-levelling, agro-forestry and water harvesting structures; bunds, check dams and other flood protection works; link roads, bridges, culverts, causeways and pony tracks; and, deep-wells, hand-pumps, tube-wells, water reservoirs, overhead tanks and gravity flow pipelines. The project will also take institutional capacity building measures. It will strengthen the operational capacity of PPAF, through the provision of office buildings, equipment and vehicles, technical assistance for improving data management and financial systems and for carrying out studies, training and funding for incremental operating costs; and, Partner Organizations (PO), through the provision of equipment, training in implementing poverty alleviation [programs, with emphasis on community mobilization and participatory approaches, and funding for incremental costs.