1 Document of The World Bank FOR OFFICIAL USE ONLY Report No: PP2263 PROJECT PAPER ON A PROPOSED GRANT IN THE AMOUNT OF US$ 1.526 MILLION EQUIVALENT TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A Debt Management Strengthening Programme at Ministry of Finance April 25, 2017 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PP2263
PROJECT PAPER
ON A
PROPOSED GRANT
IN THE AMOUNT OF US$ 1.526 MILLION EQUIVALENT
TO THE
ISLAMIC REPUBLIC OF PAKISTAN
FOR A
Debt Management Strengthening Programme at Ministry of Finance
April 25, 2017
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without
World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective April 24, 2017)
Currency Unit = PKR
USD = PKR 104.80
USD = GBP 0.78
USD = Euro 0.92
FISCAL YEAR
July 1 – June 30
ABBREVIATIONS AND ACRONYMS
AA
ABP
AFS
AGP
APPM
CDNS
CPEC
DA
DC
DDO
DFID
DMO
DPC
DPCO
EAD
EF
EFF
FRDLA
FS
FSAP
GCC
GDP
GFR
Administrative Agreement
Annual Borrowing Plan
Annual Financial Statements
Auditor General of Pakistan
Accounting Policies and Procedures
Manual
Central Directorate of National
Savings
China Pakistan Economic Corridor
Designated Account
District of Columbia
District Disbursing Officer
UK Department for International
Development
Debt Management Office
Development Policy Credit
Debt Policy Coordination Office
Economic Affairs Division
External Finance
Extended Fund Facility
Fiscal Responsibility and Debt
Limitation Act
Finance Secretary
Financial Sector Assessment
Program
Gulf Cooperation Council
Gross Domestic Product
Government Financial Rules
GRS
GoP
IFR
IMF
IPSAS
MoF
MTDS
NFC
OM
P-DMSP
PDO
PPSD
PSDP
RETF
SBP
SECP
SROs
TAGR
TORs
USAID
US$
WB
WBG
Grievance Redress Service
Government of Pakistan
Interim Financial Report
International Monetary Fund
International Public Sector Accounting
Standards
Ministry of Finance
Medium Term Debt Management
Strategy
National Finance Commission
Office Memorandum
Pakistan Debt Management Support
Program
Project Development Objectives
Project Procurement Strategy for
Development
Public Sector Development Program
Recipient Executed Trust Fund
State Bank of Pakistan
Securities and Exchange Commission
of Pakistan
Statutory Regulatory Orders
Trust Fund for Accelerating Growth and
Reform
Terms of References
United States Agency for International
Development
United States Dollar
World Bank
World Bank Group
Regional Vice President: Annette Dixon
Country Director: Patchamuthu Illangovan
Global Practice Senior Director: Carlos Felipe Jaramillo
Practice Manager: Maria Manuela Do Rosario Francisco
Task Team Leader: Saadia Refaqat
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PAKISTAN
Debt Management Strengthening Programme at Ministry of Finance
TABLE OF CONTENTS
Page
STRATEGIC CONTEXT .................................................................................................8 I.
A. Country Context ............................................................................................................ 8
B. Sectoral and Institutional Context ................................................................................. 8
C. Higher Level Objectives to which the Project Contributes ........................................ 11
PROJECT DEVELOPMENT OBJECTIVES ..............................................................11 II.
A. PDO............................................................................................................................. 11
Total Public Debt 3/ 64.1 64.7 64.4 64.1 67.5 66.1
Notes:
1/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan. 2/ Excluding grants.
3/ As per WB staff calculations and estimates.
Source: Pakistani authorities and WB staff calculations and estimates
5. The increase in gross public debt witnessed in 2015/16 after declining consecutively for
two years is due to the slight depreciation of the Pakistani Rupee against US Dollar, sizeable
revaluation losses as a result of the depreciating US Dollar against Japanese Yen,
disbursements under multilateral loans, substantial commercial borrowings and a strong build-
up of government deposits2.
6. Around 32 percent of public debt is external and is mostly on concessional terms.
Amortization and interest payments on external debt increased from 18.1 percent of exports of
goods and services in 2014/15 to 19.4 percent in 2015/16 primarily owing to a US$500 million
Eurobond bullet repayment in March 2016.
7. On the other hand, the share of domestic debt slightly decreased from 69 percent of total
public debt in 2014/15 to 68 percent in 2015/16. Moreover, maturity profile of domestic debt
continued to improve in 2015/16. This shift towards longer end of sovereign yield curve has
lowered rollover (and refinancing) risks. For instance, Average Time to Maturity (ATM) of
domestic debt – a key indicator of refinancing risk inherent in a country’s debt portfolio – has
improved from 1.8 years in 2012/13 to 2.1 years in 2015/16. Moreover, domestic debt
maturing in 1 year is 52 percent in the previous fiscal year down from 64 percent in 2012/13
(see Table 2).
8. Over the last five years there have been some significant changes in the federal landscape
of Pakistan. The 7th
NFC Award sharply increased the share of provinces in federally collected
revenue, while the 18th
Constitutional Amendment has introduced some profound changes in
FY18–FY20, and 3.5% of GDP thereafter; and maintaining a limit of 60% of GDP on the general government
debt until FY18, and adopting a 15-year transition path toward 50% of GDP. 2 Government deposits underwent an exponential increase during 2015/16, closing the year at Rs. 459 billion (or
1.6 percent of GDP) compared to Rs. 25 billion in 2014/15.
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multi-order governance in Pakistan, including devolution of significant number of additional
functions from the federal to the provincial governments. Further to this enactment and
particularly with regards to the province’s ‘right to borrow’, after an impasse of almost five
years, the National Economic Council on July, 1, 2015 took a decision to allow the provinces
to borrow in the domestic markets. This change has heightened the need to look into the
borrowing framework with a federation perspective and subsequently strengthen provincial
debt management in parallel with the strengthening at the federal level.
Table 2: Pakistan - Cost and Risk Indicators for Existing Public Debt, End-June
9. The Pakistan Debt Management Support Program (P-DMSP) of the TAGR is aimed at
strengthening debt management at the national and sub-national levels. The Federal pillar aims
at improving debt management practice in the Federal Government of Pakistan by assisting the
authorities strengthen three key functions: (i) implementation of debt management strategy,
risk management and coordination functions of Debt Policy Coordination Office (DPCO); (ii)
external debt recording and reporting in the Economic Affairs Division (EAD); and (iii)
funding in the external markets in the External Finance (EF) Wing, Ministry of Finance (MoF).
Furthermore, building staff capacity remains the cornerstone of this program. As such, P-
DMSP includes two stand-alone Recipient Executed Trust Funds: (i) MoF – DPCO and EF
Wing, and (ii) EAD to enable the client agencies to undertake activities designed for their
specific focus areas. This project essentially operationalizes one of the envisaged RETFs.
10. Donor coordination is an integral part of P-DMSP. The program envisages organizing
donor coordination meetings regularly so as to avoid duplication of efforts and facilitate
knowledge-sharing among the agencies who are active in the area (s) related to debt
management. For instance, a USAID recent project – aimed at improving domestic financial
markets in Pakistan – attempts to complement the support under the broader area of debt
management. In another WBG project on Financial Inclusion and Infrastructure, a sub-
component supports the automation and modernization of Central Directorate of National
Savings (CNDS) – responsible for retail debt – anchored on end-to-end automation which is in-
line with one of the recommendations of the 2016 Pakistan Financial Sector Assessment
Risk Indicators External debt Domestic debt Total debt
2013 2016 2013 2016 2013 2016
Amount (in millions of USD) 49,987 60,563 96,061 130,056 146,047 190,619
Nominal debt as % GDP 22.1 21.4 42.5 46.0 64.7 67.5
Source: Public Debt Management Risk Report and Medium Term Debt Management Strategy 2015/16-2018/19, Debt Policy Coordination Office, Ministry of Finance, Government of Pakistan
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Program (FSAP). The proposed project also envisions increased coordination with the Bank’s
internal partners such as the MFM Debt Group (under the Debt Management Facility) and the
WB Treasury (technical advisor for the proposed project).
C. Higher Level Objectives to which the Project Contributes
11. The World Bank Group (WBG) Pakistan Country Partnership Strategy 2015-19 is
structured around four strategic themes, or result areas: energy, private sector development,
inclusion, and service delivery. The project is aligned with the fourth result area of Service
Delivery (Outcome 4.1: Improved Public Resource Management).
PROJECT DEVELOPMENT OBJECTIVES II.
A. PDO
12. Strengthening institutional capacity of DPCO to undertake its enhanced role of managing
market and credit risks.
Project Beneficiaries
13. Ministry of Finance, Government of Pakistan.
PDO Level Results Indicators
14. (a) Strengthen risk analysis: This indicator aims to strengthen the DPCO’s capacity
to monitor and manage market risks (currency, refinancing, and interest rate)
inherent in the Pakistan’s public debt portfolio in view of the strategic targets
approved in the strategy document. The Government is already meeting these
targets as exhibited in the published risk reports and has committed to continue
meeting these during the life of the project with an emphasis on improving the
quality of the analysis presented in these reports.
(b) Deepen debt policy analysis: This indicator aims to strengthen the analytical
capacity of DPCO to undertake statutory responsibility and ensure compliance with
FRDLA. The focus would be to improve the quality of the analysis presented in the
Debt Policy Statement.
15. Furthermore, key intermediate results indicators related to the PDO capture the following
facets:
(a) Publication of Public Debt Management Risk Reports: These reports provide
key information on the compliance with the strategic targets approved in the MTDS
2015/16-2018/19. The emphasis of this indicator is on improving the quality of
these reports that were produced bi-annually in 2015/16.
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(b) Publication of Debt Policy Statement: This report is to ensure compliance with
FRDLA that requires one policy statement to be produced in a given fiscal year.
PROJECT DESCRIPTION III.
A. Project Components
Component 1: Debt management strategy evaluation and monitoring
Section I: Strategy evaluation and monitoring
16. As per Fiscal Responsibility and Debt Limitation Act (FRDLA), DPCO is mandated with
the preparation of fiscal and debt policy statements to be submitted to the National Assembly
by January of each year. It has been fulfilling this responsibility since inception. In addition,
since 2013, DPCO started to undertake some basic analysis to compare alternative borrowing
strategies. In April 2014, DPCO prepared the first-ever Medium Term Debt Management
Strategy (MTDS) for Pakistan (2014-18) that was approved by the Finance Minister. A
revision was completed in May 2016 when the Medium Term Debt Management Strategy for
Pakistan (2016-19) was published. The latter document shows a substantive improvement
regarding the clarity of the targets the debt manager should pursue.
17. The strategy (both documents) includes debt management objectives in line with
international practice that have been spelled out for the first time publicly but these are not
specified in legislation. Furthermore, the scope of the debt strategy pertains to domestic and
external debt contracted by the federal government, debt extended to provinces & SOEs on on-
lending, and IMF debt utilized towards budgetary support.
18. The updated MTDS stipulates following key strategic guidelines during 2015/16 –
2018/19: (i) gradually lengthen the maturity profile of domestic debt; (ii) pursuing a smooth
redemption profile, especially in the domestic debt; (iii) availing maximum available
concessional external financing; and indicated (iv) preference of foreign currency funding in
US Dollar over other currencies keeping in view the balance of payment requirements and
existing external debt obligations.
19. Based on these principles and the analysis, DPCO expressed its debt management strategy
in terms of bands for key risk indicators. The stated bands facilitate debt managers steering the
composition of the government debt portfolio to mitigate its key exposures, within the
constraints imposed by the domestic market and the macroeconomic environment. Periodic
risk reports now produced by the DPCO help monitor implementation and alert on the need to
adjust borrowing if necessary.
20. Further clarity and more effective guidance for managing the risk of the debt portfolio will
emerge from the gradual change of the floor and/or the ceiling of the bands to indicate the debt
manager’s intention to change the portfolio exposure over time if the macroeconomic context
and markets permit. For instance, going forward it is likely that the strategy seeks a gradual
increase in the share of foreign currency debt. However, the implementation of such a target
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would require an in-depth analysis to determine the pace at which currency risk can be
mitigated.
21. In this context, gaining experience in the implementation of the strategy will help in
revising the bands and improving the formulation of the strategy. To support implementation,
DPCO needs to strengthen communication channels with EAD and the EF wing for external
borrowing and with the Budget Wing for domestic borrowing.
22. Monitoring the implementation of the debt management strategy is typically done through
the progress made on the Annual Borrowing Plan (ABP). The ABP is usually produced as part
of the government budget indicating the gross borrowing requirements for the period and some
breakdown of the funding sources. Throughout the fiscal year, the plan is broken down by
quarters, with more detailed information on the funding sources and the timing of issuance.
These quarterly reports become a navigation tool for a Debt Management Office (DMO) and
serve as the basis for exchanges with those responsible for tapping the different funding
sources.
23. The implementation of the debt management strategy is also checked by monitoring
compliance with the approved strategic targets. Based on the reporting of the strategic targets -
semesterly, or, quarterly, depending upon data availability-, the DPCO can track progress in
the implementation of the strategy. These reports could be discussed with other internal
stakeholders to evaluate if the exposure to the different risk is kept under the expected ranges
and to explore actions that should be taken in case exposure increases beyond the set limits.
24. This sub-component will focus on technical assistance for the DPCO to strengthen the
implementation of debt management strategy and improving its monitoring. This will be
accomplished by improving the quality and increasing the frequency of periodic public debt
management risk reports by DPCO; producing periodic progress reports of the Annual
Borrowing Plan; and using those reports to review and adjust, if necessary, the borrowing
plans.
Section II: Improve Coordination
25. Debt management at the federal level in Pakistan is scattered among various institutions
and entities, most of them within the Ministry of Finance, with little coordination among them.
Federal debt management operation includes the Budget wing (MoF), External Finance wing
(MoF), State Bank of Pakistan (SBP), Central Directorate of National Savings (CDNS),
Economic Affairs Division (EAD), and Debt Policy Coordination Office (DPCO).
26. DPCO remains central to debt management in Pakistan as it is mandated by Pakistan’s
Fiscal Responsibility and Debt Limitation Act (FRDLA) to undertake coordination with all
designated entities. In addition to fiscal policy responsibilities, the DPCO is the only entity
empowered by the Law with the functions typical of a middle office (market, credit and
operational risk management functions) within a debt management office.
27. Coordination is important when designing the debt management strategy to ensure that the
DPCO receives adequate input from the different units and that there are enough iterations of
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the strategy document so that conflicts and tradeoffs between different borrowing alternatives
are properly discussed and resolved. This process can be done through exchange of
information between the DPCO and other stakeholders and through the circulation of the draft
of the strategy document. Formal and informal meetings as necessary can be held under the
leadership of the DPCO.
28. Coordination is also vital to strengthen the implementation and monitoring of the debt
management strategy. Based on the reporting of the strategic targets -semesterly, or, quarterly,
depending upon data availability- and on the progress in the implementation of the ABP, the
DPCO can track progress in the implementation of the strategy. These reports could be
discussed with representatives from EAD, EF wing, and Budget wing with the objective of
adjusting the borrowing mix if necessary.
29. This project will support the establishment and functioning of a Debt Working Group with
representatives from DPCO, EAD, EF wing, Budget wing, and SBP with the aim to strengthen
the coordination needed for the implementation of the medium term debt management strategy.
The Debt Working Group will be headed by DG (DPCO) and will have an approved terms of
reference and will meet at least once every six months.
Section III: Risk management
30. The DPCO has been designated as the unit in the Ministry of Finance that will be
responsible for risk management and such a responsibility will cover market, credit and
operational risk.
31. At present, the DPCO covers market risk management as a critical input to the preparation
of the debt management strategy. Foreign currency, refinancing and interest rate risks are
quantified through sensitivity and scenario analysis performed once a year as an assessment of
the exposure of the existing portfolio which is a key factor driving the design of the debt
management strategy. Periodic reporting on selected risk indicators initiated in 2016
constitutes vital information to assess the evolution of the government debt portfolio and the
authorities’ ability to address the inherent financial risks and attain the government debt
management objectives. Further improvement could be achieved in the content of the risk
reports and on its frequency once DPCO has direct access to the debt database.
32. Besides market risk, debt management offices are usually faced with credit risk as it is a
key ingredient in the issuance of guarantees and on-lending. The DPCO has already produced a
draft policy framework for the issuance and monitoring of loan guarantees and it is the
authorities’ intention to implement this framework with a fully functional credit risk
management unit. Currently the DPCO has not yet formalized the policy framework and lacks
the staff needed to complete these tasks. Developing the credit risk management function will
require validating and formalizing the policy framework and hiring and training the staff that
will be responsible for this function.
Activities under Component 1 Responsibility
Production of periodic risk reports DPCO
Meetings of Debt Working Group DPCO
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Consulting services on risk management DPCO
Formulation of credit risk framework DPCO
Trainings, workshops, outreach events DPCO
33. This project will help DPCO develop functionality as a center of risk management
expertise. As discussed in section 1 the Bank will continue supporting the DPCO in improving
the analysis of market risk as an input to the implementation and monitoring of the debt
management strategy. For developing the functionality to manage credit risk the project will:
(i) support institutional re-organization of DPCO as a debt management middle office (as per
the notified organogram) including the function of managing credit risk; (ii) ensure that the
quality of the policy framework for managing credit risk produced by the DPCO is in line with
international sound practice; (iii) finance the staffing of the unit and train those responsible for
performing the functions contemplated in the policy frameworks in the initial phase
(essentially during the life of the project) with the understanding that the MoF, thereafter, will
be able to retain essential staff capacity needed to continue performing these functions. To this
end, the notification of the enhanced functionalities and new organogram of DPCO as well as
the improved visibility of DPCO within MoF as a middle office during the project should serve
as an enabler.
Component 2: Capacity building of the EF Wing for raising financing from international
capital markets
34. The External Finance (EF) wing in the Ministry of Finance is responsible for borrowing in
international capital markets and for negotiating and monitoring program lending by
International Financial Institutions (IFIs) (including the IMF). EF wing also supports EAD in
the analysis of the terms and conditions of those loans from bilateral and multilateral
institutions that are handled by EAD. In sum, EF wing plays a substantive role in the
implementation of the annual borrowing plan produced after the GoP medium-term debt
management strategy.
35. The Government of Pakistan is increasingly meeting a share of its financing from
international capital markets, with a significant impact on the overall funding cost of the debt
portfolio. In sum, during the last twenty-four months, Pakistan has borrowed almost US$4.5
billion from international capital markets. Moreover, the updated MTDS indicates a medium-
term plan to continue issuing Eurobonds/Sukuks. Given Pakistan’s regular tapping of
international capital markets, there is a need to develop institutional capacity to lead these
operations by the EF wing.
36. Historically, Pakistan has sourced a significant part of the external funding from bilateral
and multilateral creditors, mostly on concessional terms, and the funding unit’s main function
revolves around negotiating with multilateral and bilateral creditors. As the country is now
increasingly recurring to market-based funding, the skills set of the staff in EF wing also needs
to evolve since preparation and negotiation of official funding is usually related to nonfinancial
terms, as opposed to market based funding which requires greater financial markets expertise.
Indeed, the functionality of a front office is driven by the diversity and nature of products
available to a Debt Management Office.
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37. The negotiation and signing of loans with multilateral institutions justify the close
involvement of high level officials. Loans with international financial institutions like the IMF
or the World Bank are often tied to the implementation of domestic policies or programs, or, to
the execution of projects which require high level commitment and coordination within the
government both at the planning and execution stages. Therefore, the involvement of high level
official for this type of funding activities is essential. In contrast to the complexity of the loan
contracts that emanate from the non-financial clauses laying out the investment project or the
economic program being financed, the financial terms tend to be relatively standard and
“imposed” by the lender.
38. Capital market transactions on the other hand require thorough market monitoring and
intelligence gathering. Understanding of market conditions is a key ingredient for the issuer to
make informed decisions with regard to the timing, market, structure and other characteristics
of a potential transaction. Comparing different alternatives requires a technically qualified
team with the skills and experience to advise top level management and execute the transaction
that the top management approves. These tasks will need capacity building of the technical
staff at EF wing and greater reliance on their work. Thus it is imperative to have a dedicated
technical team well acquainted with market developments, capable of processing information
collected and presenting findings to top management on a regular basis through written reports
and face-to-face meetings.
39. Pakistan has, historically, been executing these transactions with the help of lead managers
in line with the standard international capital market regulations. Absence of robust market
monitoring and a functioning investor communication setup at the EF wing, at times, leaves the
government exposed to the lead managers’ market views which may not always be aligned
with government objectives. In the long term the EF wing needs to build the institutional
capacity required to raise external funding in the best possible conditions and largely with its
own information set.
40. This project will help Pakistan to develop the capability to manage the issuance of bonds in
the international capital market. This will be accomplished by: (i) strengthening the
organizational setting for the external funding functions and (ii) building the capacity of the
staff in charge of these functions. To improve the organizational setting the project will support
improved coordination between the EF wing and the DPCO in implementation of the debt
management strategy and between the EF wing and EAD for the execution of non-market
borrowing. The capacity building will focus on the functions of market intelligence,
communication with investors and rating agencies, the execution process and the funding mix.
For developing these functions the project will provide the necessary infrastructure, including
Bloomberg and hands-on and generic training to the team selected by the EF wing.
Specifically, the training program will cover basic fixed income securities, market intelligence,
reporting, international best practices, investor relations program, transaction execution,
communication strategy with rating agencies, use of Bloomberg, documentation, legal aspects
and in-house training with investment banks.
Activities under Component 2 Responsibility
Production of market monitoring reports EF wing
Procurement of Bloomberg EF wing
Draft Procedures Manual governing the issuance in the international capital market EF wing
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Capacity building training program on fixed income securities, market intelligence, reporting,
investor relations program, communication strategy with rating agencies, etc. EF wing/WB
B. Project Cost and Financing
41. The project will be fully financed through a grant of USD 1.53 million from the DFID
Trust Fund for Accelerating Growth and Reforms (TAGR). The component wise distribution
of the total grant is indicated below.
Project Components Project cost Grant Financing % Financing
1. Debt management strategy evaluation and
monitoring
2. Capacity building to the EF Wing for raising
financing from international capital markets
Total Baseline Costs
Physical contingencies
Price contingencies
1.326
0.200
1.526
1.326
0.200
1.526
100
100
100
Total Project Costs Interest During Implementation
Front-End Fees
Total Financing Required
1.526
1.526
42. The Bank’s Incremental Costs for supervision (staff costs, missions and field visits),
monitoring and management of the project by WB staff based in Pakistan, Washington DC and
technical specialists in Washington DC will be covered by the Bank-executed Trust Fund
supervision window of PDMSP under TAGR.
C. Lessons Learned and Reflected in the Project Design
43. The provision of TA on federal debt management in Pakistan by the Bank since
2010/11 suggests a number of relevant lessons. Most importantly, debt management reform
and capacity building are complex, and take time. Furthermore, the authorities’ capacity to
develop and implement effective debt management strategies is affected by both their
analytical capacity and the enabling institutional structure. Lessons from the past five to six
years of program implementation at the federal level include the following, of which some
have been incorporated in the design of this project:
(a) Effective debt management cannot be seen in isolation. Building robust capacity
requires efforts to strengthen practices across a number of parallel work streams,
and often involves governance reforms, such as consolidation of federal debt
management function, and legal changes that requires sustained commitment of
senior policy makers. Recent Amendments to the FRDLA are a good start in the
right direction.
(b) Capacity constraints and exogenous factors have also impeded efforts to
improve the institutional and operational capacity for federal debt management in
Pakistan. This argues for continued support from the Bank if debt management
policies and practices are to become fully resilient. Such progress also requires
significant time and sustained commitment on the part of authorities.
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(c) Strong country ownership of the reform effort is critical for success. The
program design reflects this lesson in terms of supporting three out of six debt
management agencies at the federal level (two agencies under this project).
(d) The role of effective debt management within broader Bank and Fund policies
has supported the absorption of TA efforts. Progress has been more sustained where
it has been complemented by related design elements in a Bank loan or Fund
program arrangement. For example, the notification of enhanced functionalities and
new organogram of DPCO was enabled through the WBG Competitiveness and
Growth Development Policy Credit (DPC). Moreover, the reform agenda on debt
management was furthered under the recently concluded IMF EFF program through
relevant structural benchmarks such as the production and update of the strategy
document as well as subsequent publication of periodic risk reports.
(e) Given the limited leverage of TAs, the authorities’ buy-in is fundamental. Only
if the authorities are convinced and fully committed to the program will it succeed.
Secondly, the pace of the program has to be realistic and aligned to what the
authorities can do. Thirdly, close monitoring is needed to be able to react timely if
there are deviations from the originally envisaged program.
IMPLEMENTATION IV.
A. Institutional and Implementation Arrangements
44. Implementation arrangements for the project rely primarily on the existing arrangements
which are in place in the MoF. Debt Policy Coordination Office, Ministry of Finance will be
the implementing agency, with the participation of the EF wing. DPCO is the agency, as a
middle office, responsible for producing the debt management strategy. It is also the agency
responsible for co-ordination amongst all debt management entities in Pakistan, as per
FRDLA.
45. DPCO (MoF) will be responsible for (a) reporting on the PDO and intermediate results
indicators, and project implementation; (b) providing all fiduciary oversight for the funds
released to them; (c) ensuring that the Bank’s fiduciary regulations and requirements are
followed; and (d) coordinating support from and actively communicating with the Bank.
Institutions, which will implement activities under the project, include DPCO and EF wing
within MoF (see Annex 2).
B. Results Monitoring and Evaluation
46. Project activities will be monitored on an ongoing basis to support the PDO achievement.
The key PDO indicators and intermediate indicators detailed in Annex-1 will be collected and
reported on in regular monitoring reports, quarterly progress reports, and in the final
assessment on completion of the project.
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C. Sustainability (if applicable)
47. The enhanced mandate of DPCO will be sustained after the project closure as the new
structure of DPCO has been notified by MoF in March 2016. Thus, the MoF intends to retain
the risk management posts of DPCO after the closure of the project. Therefore, to this end, the
notification of the enhanced functionalities and new organogram of DPCO as well as the
improved visibility of DPCO within MoF as a middle office during the project should serve as
an enabler.
48. For the EF wing, the continuation of intelligence gathering and market monitoring
functionalities are dependent upon subscription to Bloomberg services. To ensure
sustainability, government may consider servicing the subscription fee from its own resources
after project closure, depending on the future utility of the services provided by Bloomberg. To
this end, an allocation in the Federal Budget 2018/19 for this expenditure should serve as
evidence.
KEY RISKS AND MITIGATION MEASURES V.
49. The overall implementation risk rating for the project is Substantial. Substantial risks to
the project arise from country level factors. There is a substantial risk of sudden change to the
political landscape in Pakistan as a result of upcoming elections in 2018, and this political
instability creates the risk of a shift or change in government priorities and policies. Moreover,
governance is a considerable concern for growth and development in Pakistan. Institutions of
accountability have not provided a strong framework for holding the executive or service
delivery agents accountable for results.
50. Macroeconomic risks are rated substantial, stemming from the possibility of domestic and
external shocks. Pakistan recently successfully completed a 36 months IMF-Extended Fund
Facility (EFF) program showing a solid macroeconomic record, a large reserve cushion,
healthy fiscal accounts and a tight monetary policy. Post-IMF program, it is essential to build
on the on-going macroeconomic consolidation. However, possible expansionary fiscal policy
leading up to the upcoming elections, pose a serious downside risk. The pursuance of such a
policy may disrupt the implementation of the debt strategy through linkages to interest rate,
refinancing and currency risks. Such a deviation may have implications for the government to
continue prudent debt management practices, particularly complying with the stated risk bands
in the strategy document. Moreover, the country is exposed to frequent natural disasters. This
together with spillovers from the materialization of the unresolved circular debt arrears may
also affect fiscal consolidation. Externally, a persistent dollar appreciation with limited
exchange rate flexibility may further erode export competitiveness. Additionally, the slow-
down of remittances inflow as a result of fiscal consolidation in GCC countries is a serious
downside risk for Pakistan. In order to mitigate this, the Bank will keep working in tandem and
closely with the Government, coordinating design and implementation of their respective
operations to ensure sustainable macroeconomic environment.
51. Weak policy coordination, staff turnover and counterpart capacity constraints may affect
the project and speed of implementation. There exists strong ownership for the project at the
top level but buy-in within the Finance Division and among other federal debt management
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stakeholders remains a concern. However, these risks are being mitigated with a range of
efforts, including extensive stakeholder consultations to build strong and wide ownership for
sustained reforms.
52. The project is linked to TAGR, which has an end-implementation date of April 30, 2018.
This significantly reduces the implementation time of the project and poses a risk to the
sustainability of the project.
53. Despite the overall risk rating as Substantial it is important that there is continuous
engagement with all entities responsible for federal debt management to maintain focus on
priority reforms. Resolution of critical capacity constrains through the project will enable
DPCO to become quickly visible in the federal debt management arena. Provision of timely
and technical advice on debt management issues, including borrowing, lending instruments,
lending rates, and guarantees through enhanced and focused capacity building by the project,
will increase visibility of the DPCO in a very short time, which will encourage institutional
sustainability and ownership. In order to ensure this, the institutional re-organization of DPCO
as a debt management middle office and the notification of the new organogram of the Office
are steps in the right direction.
APPRAISAL SUMMARY VI.
54. The project is designed to assist the GoP to implement a debt management strategy that
contributes to fiscal and debt sustainability while minimizing funding costs. Thus, a visible
economic benefit of the project is efficient debt management, which can in turn lead to
expected reduction in the government’s financing cost. For example, a 20 basis points
reduction in the average interest rate3 over the life of the project would result in an expected
saving of almost US$ 600 million or 400 times the cost of the project.
55. On the basis of the outcome of appraisal it has been determined that procurements are low
risk and low value and shall be completed using the national procurement systems. The
mitigation measures in using national procurement rules will be stipulated in the Grant
Agreement.
56. The designed financial management arrangements for the project are based on country
systems and provide reasonable assurance of the use of grant proceeds for intended purposes.
For managing project’s FM arrangements, an Accounts Officer will be deputed from the office
of CGA or hired by DPCO competitively from market. Government budgeting rules and
procedures will apply and project’s budget will be a part of Federal Government’s PSDP of
each respective Financial Year. A segregated Designated Account (DA) in US Dollars will be
established by DPCO in the National Bank of Pakistan for receipt of funds from the Bank for
executing project activities. Disbursements will be report based and the Bank will transfer
funds to project's DA on the basis of six-months cash forecast reported in project's bi-annual
Interim Financial Reports (IFR). The Bank will document the expenditure against advances
based on the six-monthly IFRs to be submitted within 45 days of the close of each calendar
semester. DPCO will maintain books of accounts on cash basis of accounting in accordance
3 Average interest rate implies the average nominal interest rate on public debt calculated in the Joint Bank-Fund Debt Sustainability Framework for Middle-Income Countries.
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with government accounting policies and will follow GFR as internal control framework.
Project’s annual financial statements (AFS) will be prepared in accordance with the Cash Basis
IPSAS. Auditor General of Pakistan (AGP) will conduct audit of the Project’s AFS; and
audited financial statements of project will be submitted to the Bank within six months of the
close of each financial year. There is no outstanding audit report or ineligible expenditure
from DPCO.
57. The project has been classified as environmental Category C. Moreover, the project does
not trigger OP 4.12 or OP 4.10.
A. Other Safeguards Policies Triggered
58. There is no other safeguard policy triggered.
B. World Bank Grievance Redress
59. Communities and individuals who believe that they are adversely affected by a World
Bank (WB) supported project may submit complaints to existing project-level grievance
redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that
complaints received are promptly reviewed in order to address project-related concerns. Project
affected communities and individuals may submit their complaint to the WB’s independent
Inspection Panel which determines whether harm occurred, or could occur, as a result of WB
non-compliance with its policies and procedures. Complaints may be submitted at any time
after concerns have been brought directly to the World Bank's attention, and Bank
Management has been given an opportunity to respond. For information on how to submit
complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit
http://www.worldbank.org/GRS.For information on how to submit complaints to the World
Bank Inspection Panel, please visit www.inspectionpanel.org.
