The Asian Development Bank is in the process of forming a project team to work with Pakistan to map out and prioritise requirements for the financial sector’s growth and diversification.

An ADB country consultation mission has already discussed with the government a proposed technical assistance loan of $10m-equivalent from the Asian Development Fund to finance the financial sector and debt management project and the accompanying small-scale policy and advisory technical assistance for $225,000 on a grant-basis by the ADB’s Technical Assistance Special Fund.

The ADB feels that the corporate debt market is underdeveloped and the private sector is heavily dependent on the banking sector for finance. The country is relatively under-leveraged as an economy, with total private sector debt at about 20pc of GDP. The average maturity of domestic public debt is 1.8 years, which means that the risk-free yield curve is not developed and the benchmarking for the cost of long-term capital is very difficult.

The government provides energy subsidies for the difference between the tariff billed to customers and the cost-recovery tariff determined by the National Electric Power Regulatory Authority. The government’s delay in paying the subsidies, among other factors, has led to substantial and costly payment arrears to fuel suppliers and independent power producers (IPPs).

Investors and their banks have become concerned over the increased exposure of government guarantees that underpin the creditworthiness of power purchase agreements, and about the sharp increase in public debt to fund liquidity support and subsidies

Investors and their banks have become concerned about increased exposure of government guarantees that underpin the creditworthiness of power purchase agreements, and about the sharp increase in public debt to fund liquidity support and subsidies.

The government issued guarantees to secure debt owed by public sector enterprises like PIA and Pakistan Steel. These guarantees totalled Rs626bn by FY13, and counter guarantees against commodity-financing operations totalled Rs571bn. The government has also guaranteed payment obligations under power purchase agreements entered into between the central power purchase agency and IPPs.

However, the government has limited capacity to monitor and manage public debt and contingent liabilities in a comprehensive manner. It is estimated that priority infrastructure projects in the power sector alone need long-term financing of $9.7bn from the public sector and $14.9bn from the private sector.

According to the ADB, the availability of financing for energy, transport and other infrastructure projects from capital markets is extremely limited. Infrastructure finance from banks has been static for many years for a number of reasons, including concerns about circular debt; a strong bias towards asset-backed corporate loans and risk-free public debt; and banks’ internal portfolio preferences.

To help address this gap, the State Bank has issued guidelines on infrastructure project financing and developed proposals for an infrastructure financing vehicle that would issue long-term conventional bonds and Sukuks to generate funds from the local market.

Traditional investors in other markets in long-term instruments include insurance companies, pension funds and other similar capital participants, but those in Pakistan are risk averse and lack experience of investing in infrastructure project bonds and Sukuks. Natural catastrophes and other insurable risks not properly allocated.

Pakistan has 65 private life and general insurance companies and brokers, and the life insurance segment is dominated by the state-owned State Life Insurance Company. Penetration was 0.37pc of GDP for non-life and 0.56pc for life insurance in FY13 — one of the lowest in the world.

Pakistan has suffered from natural catastrophes. The value of the losses is not well-documented, but between 2005 and 2011, it may have totalled $20.4bn, based on preliminary damage assessments jointly carried out by the ADB and the World Bank.

The country is one of the world’s largest producers of cotton, wheat and rice. But the agriculture sector suffers from a lack of infrastructure, inefficient markets, low storage capacity and outdated farming practices. The lack of storage capacity in both the public and private sectors sets off a chain of negative events that starts with low farm incomes and high post-harvest losses, and culminates in massive borrowing by the government for commodity purchases from commercial banks.

Poor storage also hampers the creation of links between agriculture and formal finance sectors, as a system of warehouse receipts cannot come into existence. Currently, total bank lending to the sector is less than 7pc of banks’ aggregate lending portfolio. Mechanisms like warehousing receipt financing, further strengthening of COMMODITY EXCHANGES, introducing value chain financings and other similar products can increase the availability of capital for the sector.

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