ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has approved the relending of foreign loans on the same terms as borrowed by the government.
As per Economic Affairs Division’s (EAD) Relending Policy 2020, relending rate for provincial governments, autonomous bodies and Development Financial Institutions (DFI) will be at the actual rate while 2 per cent penal interest will be charged on amounts that remain unpaid for 30 days after the due date.
Similarly, one time fixed administrative charges at the rate of 0.25pc will be charged at the time of each disbursement, while DFIs are allowed to charge 3pc further spread from end borrowers.
According to documents, relending rates for provincial governments and DFIs was 12pc under the policy for 2009, 9pc under the policy for 2016 and 13.1pc as of June 2020.
Similarly, the relending rate for autonomous bodies was 15pc under the policy for 2009, 12pc under the policy for 2016, and at 15.75pc as of June 2020.
According to EAD Secretary Noor Ahmed, the primary objective behind the introduction of Relending Policy, 2020, was to cover the cost of borrowing as most borrowing agencies were either defaulting in repayment or accumulating arrears on account of delayed payments.
It is relevant to note here that relending rates under the policies for 2009 and 2016 have reflected changes in the average cost of borrowing, while the average cost of external borrowing by the federal government for the last five years was at 3.6pc per annum with the rupee depreciating by 9.1pc per annum against US dollar during the same period.
A revision in the existing relending policy was required to accurately reflect the changes in borrowing cost of the federal government, exchange risk coverage (ERC) and to have an in-built fiscal incentive to encourage repayments by borrowers.
On finding variation in the average cost of borrowing and exchange risk, the EAD proposed the ECC to approve Relending Policy, 2020 to relend foreign loans to all entities on the same financing terms as borrowed by the government.
Meanwhile, Federal Minister for Energy Omar Ayub Khan, during a meeting of the ECC held earlier in the month, had stated that the move might increase the cost of electricity.
“Relending foreign loans on the same financing terms as borrowed might increase the cost of electricity as the cost of borrowing would also be included in the price of electricity,” he warned.
