Report and Recommendation of the President to the Board of Directors

Project Number: 54193-001 June 2020

Proposed Countercyclical Support Facility Loan Islamic Republic of Pakistan: COVID-19 Active Response and Expenditure Support Program

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 18 May 2020)

Currency unit

–

Pakistan rupee/s (PRe/PRs)

PRe1.00 = $0.0062 $1.00 = PRs161.1195

ABBREVIATIONS

ADB

AIIB BISP CAREC CARES COVID-19 CPRO DMF EAL ECC EFF GDP IMF MNHSRC MOF OCR PFM PPE PRC SBP SHIFT SMEs SPBL TA UN UNICEF US WHO

– – – – – – – – – – – – – –

– – – – – – – – – – – – – –

Asian Development Bank Asian Infrastructure Investment Bank Benazir Income Support Programme Central Asia Regional Economic Cooperation COVID-19 Active Response and Expenditure Support coronavirus disease COVID-19 Pandemic Response Option design and monitoring framework emergency assistance loan Economic Coordination Council Extended Fund Facility gross domestic product International Monetary Fund Ministry of National Health Services, Regulation and Coordination Ministry of Finance ordinary capital resources public financial management personal protective equipment People’s Republic of China State Bank of Pakistan Securing Human Investments to Foster Transformation small and medium-sized enterprises special policy-based loan technical assistance United Nations United Nations Children’s Fund United States World Health Organization

NOTES

(i) The fiscal year (FY) of the Government of Pakistan ends on 30 June. “FY” before

a calendar year denotes the year in which the fiscal year ends, e.g., FY2019 ends on 30 June 2019.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Werner E. Liepach, Central and West Asia Department (CWRD) Director Tariq H. Niazi, Public Management, Financial Sector, and Trade Division

(CWPF), CWRD Xiaohong Yang, Country Director, Pakistan Resident Mission, CWRD

Team leader Hiranya Mukhopadhyay, Principal Public Management Specialist, CWPF, CWRD

Team members One ADB Team*

Aaron Batten, Principal Planning and Policy Economist, Operations Planning and Coordination Division, Strategy, Policy and Partnerships Department (SPD) Shinsuke Kawazu, Principal Counsel, Office of the General Counsel Farzana Noshab, Senior Economics Officer, Pakistan Resident Mission, CWRD Lyle Raquipiso, Senior Economics Officer, CWPF, CWRD Mary Alice Rosero, Social Development Specialist (Gender and Development), Portfolio, Results, Safeguards, and Gender Unit (CWOD-PSG), CWRD Mariane Sual, Senior Operations Assistant, CWPF, CWRD Zehra Abbas, Principal Environment Specialist, Safeguards Division (SDSS), Sustainable Development and Climate Change Department (SDCC) Haidy Ear-Dupuy, Senior Social Development Specialist (Core Labor Standards), SDSS, SDCC Kashif Jamal, Financial Management Specialist, Public Financial Management Division, Procurement, Portfolio and Financial Management Department Amir Jilani, Young Professional, Social Development Thematic Group, SDCC Januar Laude, Senior Financial Control Specialist, Loan and Grant Disbursement Section, Controller’s Department Kaukab Naqvi, Senior Economist, Economic Analysis and Operational Support Division, Economic Research and Regional Cooperation Department Oksana Nazmieva, Principal Financial Management Specialist, CWOD-PSG, CWRD Irina Novikova, Senior Social Development Specialist (Safeguards), SDSS, SDCC Keiko Nowacka, Social Development Specialist (Gender and Development), Gender Equity Thematic Group, SDCC Lindsay Renaud, Results Management Specialist, Results Management and Aid Effectiveness Division, SPD

Peer reviewer Bruno Carrasco, Chief of Governance Thematic Group, SDCC * Interdepartmental advisory team

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 2

A. Background and Development Constraints 2

B. ADB Support Through COVID-19 Pandemic Response Option 7

C. Proposed Program, Impacts, Lessons Learned, and Value Addition 9

D. Development Financing Needs and Budget Support 11

E. Implementation Arrangements 13

III. DUE DILIGENCE 13

A. Governance 13

B. Poverty and Social 14

C. Gender 14

D. Safeguards 14

E. Risks and Mitigating Measures 15

IV. ASSURANCES 15

V. RECOMMENDATION 15

APPENDIXES

1. Design and Monitoring Framework 16

2. List of Linked Documents 18

3. Development Policy Letter 19

4. Compliance with Covid-19 Pandemic Response Option Access Criteria 21

5. Selected Fiscal Reforms Initiated by Government of Pakistan after July 2019 26

6. Summary of Measures to Control the COVID-19 Pandemic 27

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 13052020082716016327 Generated Date: 20-May-2020 21:52:45 PM

1. Basic Data Project Number: 54193-001Project Name COVID-19 Active Response and

Expenditure Support ProgramDepartment/Division CWRD/CWPF

Country Pakistan Executing Agency Ministry of FinanceBorrower Ministry of Economic Affairs Government

of PakistanCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=54193-001-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=54193-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 100.00

Social protection initiatives 300.00

Health Disease control of communicable disease 100.00

Total 500.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.3, 1.a, 1.bSDG 3.3, 3.8SDG 5.1SDG 8.8SDG 9.1SDG 10.2, 10.4SDG 17.4

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 500.00 Sovereign COVID19 Pandemic Response Option (Regular Loan): Ordinary capital resources

500.00

Cofinancing 1,000.00 Asian Infrastructure Investment Bank - COVID19 Pandemic Response Option(Not ADB Administered)

500.00

World Bank - COVID19 Pandemic Response Option (Not ADB Administered) 500.00

Counterpart 0.00 None 0.00

Total 1,500.00

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Islamic Republic of Pakistan for the COVID-19 Active Response and Expenditure Support (CARES) Program under the Countercyclical Support Facility–COVID-19 Pandemic Response Option (CPRO).1 2. The proposed CARES Program is part of an integrated package of support to help the Government of Pakistan’s immediate efforts to mitigate the significant negative health, social, and economic impacts of the coronavirus disease (COVID-19) pandemic. The CARES Program will provide budget support to help finance countercyclical development expenditures. This support will deliver (i) social protection for the poor and vulnerable, (ii) an expanded health sector response to the pandemic, and (iii) a pro-poor fiscal stimulus package to ensure recovery in growth and employment. 3. The government meets all the access criteria of the Asian Development Bank (ADB) CPRO under the Countercyclical Support Facility (Table 1 and Appendix 4). The Pakistan CARES Program is aligned with ADB’s Strategy 2030, including operational priorities on addressing remaining poverty and reducing inequalities, accelerating progress in gender equality, strengthening governance and institutional capacity, and fostering regional cooperation and integration. 2 The CARES Program will also help implement CAREC 2030, 3 and ADB’s Operational Plan for Integrated Disaster Risk Management 2014–2020.4

Table 1: Compliance with CPRO Access Criteriaa

CPRO Access Criteria ADB Staff Assessment

1. Adverse impact of exogenous shocks

A sharp decline in growth, revenue collection, and employment has occurred in FY2020 because of the COVID-19 pandemic. GDP growth is expected to be -1.5%, against 2.4% projected before the pandemic. Revenue, exports, and remittances are expected decline during FY2020. Total revenue is expected to decline by $6 billion in FY2020, from the pre-COVID target (para. 12). The pandemic has also had a significant impact on employment and poverty (para 14).

2. Countercyclical development expenditures

The government has acted quickly to approve a countercyclical development expenditure program. The countercyclical development expenditure package of $7.23 billion, approved on 30 March 2020, consists of three broad areas of support: health measures, social safety net measures, and economic stimulus measures. The government also approved a comprehensive COVID-19 Strategic Preparedness and Response Plan, including $595 million in financing for priority activities, on 23 April 2020 (paras. 16–21).

3. Pre-shock record of generally sound macroeconomic management

The government remained on track in the implementation of its IMF EFF before the pandemic. It had made substantive progress toward improved macroeconomic management since July 2019. For example, the transition to a market-determined exchange rate was extremely orderly, the external position improved significantly, and the budget execution improved considerably with a primary surplus during July–February FY2020. The government enacted the Public Finance Management Act, 2019 to improve fiscal transparency. It remains fully committed to adhering to its fiscal rules under the act. Further details are in paras. 4–7.

1 ADB. 2020. Policy Paper: ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila. 3 ADB. 2017. CAREC 2030: Connecting the Region for Shared and Sustainable Development. Manila. 4 ADB. 2014. Operational Plan for Integrated Disaster Risk Management, 2014–2020. Manila.

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CPRO Access Criteria ADB Staff Assessment

4. Structural reforms (including health response)

On 13 March 2020, the government launched the National Action Plan for COVID-19, which identifies short-, medium- and long-term actions to be taken for the outbreak preparedness, containment and mitigation. Under the National Action Plan, the government also approved a comprehensive COVID-19 Strategic Preparedness and Response Plan with specific actions and structural reforms grouped under eight pillars (Appendix 4). The government has taken several other steps to contain the outbreak of the COVID-19 pandemic. These include enforcing social distancing, repurposing and augmenting medical facilities and personnel, procuring additional testing kits and equipment, and suspending air travel (paras. 17–18).

5. Debt sustainability Pakistan’s public debt reached 84.8% of GDP by the end of fiscal year FY 2019 (June 2019) from 72.1% of GDP in FY2018 (without guarantee). This can be attributed to high primary deficit. The debt–GDP ratio, however, declined to 77.3% by December 2019. ADB’s analysis concludes that the debt–GDP ratio is expected to reach 84.1% in FY2020 due to additional borrowings.5 Financial support from ADB, AIIB, and the World Bank for the COVID-19 pandemic will raise the debt–GDP ratio by 0.8 percentage points in FY2020. Net additional lending from IMF due to the COVID-19 pandemic will add 0.2% of GDP to the debt stock in FY2020. The debt–GDP ratio can decline to 73.4% by FY2024. However, this will require strong adjustments in primary balance (para. 22 and Debt Sustainability Analysis accessible from the list of linked documents in Appendix 2).

6. Coordination with the IMF

Collaboration and coordination with the IMF have been strong, including sharing of information and data and cross-verification of analyses. Similar consultations have taken place with the World Bank and AIIB to finalize parallel financing arrangements. Regular consultation has taken place with bilateral partners and UN organizations, especially in the context of finalizing Pakistan’s COVID-19 Strategic Preparedness and Response Plan (para. 23).

ADB = Asian Development Bank, AIIB = Asian Infrastructure Investment Bank, COVID-19 = coronavirus disease, CPRO = COVID-19 Pandemic Response Option, EFF = Extended Fund Facility, FY = fiscal year, GDP = gross domestic product, IMF = International Monetary Fund, UN = United Nations. a More detailed information is in Appendix 4. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

4. Pre-COVID-19 economic outlook. From FY2017 to FY2019, Pakistan faced severe economic challenges because of a rapidly expanding fiscal deficit; a large balance-of-payments gap and critically low foreign exchange reserves caused by eroding competitiveness and lack of export diversification; and growing losses from several major state-owned enterprises, including energy sector debt resulting from untargeted and unfunded subsidies and operational inefficiencies. The new government, which took office in August 2018, prepared a comprehensive recovery program and approached the International Monetary Fund (IMF) for assistance. On 3 July 2019, the executive board of the IMF approved a 39-month extended arrangement under the IMF’s Extended Fund Facility (EFF) for Pakistan.6 ADB participated in developing the economic recovery program and provided budget support to carry out trade and energy reforms.7 ADB also

5 Low growth in nominal GDP is also contributing to the debt to GDP ratio. 6 IMF. 2019. Pakistan: Request for an Extended Arrangement under the Extended Fund Facility: Press Release: Staff

Report; and Statement by the Executive Director for Pakistan. IMF Country Report. No. 19/212. Washington, DC. 7 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach and Policy-Based Loan for Subprogram 1 to the Islamic Republic of Pakistan for the Trade and Competitiveness Program. Manila.; and ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 to the Islamic Republic of Pakistan for the Energy Sector Reform and Financial Sustainability Program. Manila.

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provided budget support under a special policy-based loan (SPBL) to facilitate the implementation of the selected reforms.8 These reform initiatives led to considerable improvements in Pakistan’s macroeconomic management (Appendix 4). Data on key macroeconomic indicators from July 2019 to February 2020 are in Table 2.

Table 2: Economic Recovery Program: Some Early Results Before the EFF

(July–February FY2019) With EFF

(July–February FY2020)

Trade deficit ($ billion) 20.0 13.2 (51.5% decline)

Current account deficit ($ billion) 9.8 2.8 (250% decline)

New foreign direct investment ($ billion) 1.1 1.9 (72.7% increase)

Tax revenue collection ($ billion) 14.0 16.5 (17.2% increase)

Primary balance ($ billion) (2.0) 0.9 (2.9 percentage point improvement)

Net reserves with the SBP ($ billion) 7.7 (as of 2 August 2019)

12.7 (64.9% increase) (as of 13 March 2020)

( ) = negative. EFF = Extended Fund Facility, SBP = State Bank of Pakistan. Source: Ministry of Finance.

5. The government’s initiatives to enhance public financial management (PFM) and budget transparency have supported improvements in macroeconomic management. The government has taken a three-pronged approach. First, it reduced fiscal and quasi-fiscal deficits, supported by stronger revenue growth that exceeded targets under the IMF EFF, to create fiscal space to support social and development spending.9 The agreed strategy aims to broaden the tax base and enhance tax compliance to achieve a 4–5 percentage point increase in the tax–gross domestic product (GDP) ratio over 4–5 years. Second, on the expenditure side, the budget incorporates implicit subsidies in the energy sector that were not budgeted in the past and contributed to the buildup of circular debt. Third, it is implementing the Public Finance Management (PFM) Act, 2019 to improve fiscal discipline by requiring parliamentary approval of supplementary budget authorizations. Recent legal amendments will limit the use of statutory regulatory orders to emergencies, preventing their use (as in the past) for creating frequent tax concessions by waiving sales tax obligations (Appendix 5). To support these efforts, provinces aim to increase the collection of property and sales taxes and assume more spending responsibility. 6. Revenue mobilization and improving the allocative efficiency of scarce public resources will thus remain one of the central themes of the improved macroeconomic management. The government has initiated critical reforms in these areas (Appendix 5). Given the challenges of sharp fiscal adjustment, ADB is currently processing technical assistance (TA) support in three critical areas to strengthen government’s fiscal consolidation initiatives. These include supporting the implementation of initiatives under the PFM Act, facilitating the setting up of a tax policy unit to improve capacity on tax policy matters, and helping the government design a law on state-owned enterprises to minimize unproductive subsidies to the state-owned enterprises. These reforms were included in the IMF EFF program. Government’s formal agreement (memorandum of understanding signed in 2019) between the federal and provincial governments on fiscal targets to sustain comprehensive fiscal consolidation efforts was also an important reform in this direction.

8 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Special Policy Based

Loan to the Islamic Republic of Pakistan for the Economic Stabilization Program. Manila. 9 IMF. 2019. First Review under the Extended Arrangement under the Extended Fund Facility and Request for

Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director of Pakistan. IMF Country Report. No. 19/380. Washington, DC.

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7. The government has agreed with the IMF on the appropriateness of countercyclical spending in response to the COVID-19 pandemic, and to embark on fiscal consolidation initiatives as early as possible. The government’s commitment to reform is also evidenced in the ongoing implementation of key reforms in the Trade and Competitiveness Program (subprogram 2), the Energy Sector Reform and Financial Sustainability Program (subprogram 2), and the forthcoming Capital Market Development Program (subprogram 1) supported by ADB; and the Resilient Institutions for Sustainable Economy (RISE) program, Securing Human Investments to Foster Transformation (SHIFT) program supported by the World Bank.10 The IMF has provided an additional $1.4 billion to meet the government’s financial requirements during FY2020. 8. Health impacts of the COVID-19 pandemic. Pakistan has seen a significant increase in confirmed cases of COVID-19, from the initial two cases on 26 February 2020 to about 72,460 as of 2 June 2020, with 1,543 deaths. Sindh is currently the region with the highest number of cases (28,245), followed by Punjab (26,240), KPK (10,027), and Balochistan (4,393). 9. As more data become available, the World Health Organization (WHO) has undertaken fresh predictive analysis, triangulating data from multiple countries. Based on this analysis, the Ministry of National Health Services, Regulation and Coordination (MNHSRC) projects a total incidence load of more than 196,000 cases of COVID-19, of which an estimated 30,000 will require hospitalization and about 10,000 will need critical care. Related measures include continuing partial lockdown and effective social distancing measures, which started in March 2020, for 9 months. 10. The weak institutional health capacity is clearly discernible from the following data. The coverage of the essential health workforce (physicians, nurses, female health workers, and community midwives) in Pakistan is low, at 1.45 per 1,000 population11—below the threshold of 4.45 per 1,000 population. The country has 0.6 hospital beds per 1,000 population, and more than 50% of people seek health services from private providers. The limited availability of lifesaving emergency obstetric and neonatal care is evidenced by the high lifetime risk of maternal death, which is 1 in 180 (the third highest in Asia and the Pacific, with an estimated 8,300 maternal deaths) and a maternal mortality ratio of 140 per 100,000 live births, with wide variation between provinces. 11. Pakistan’s inadequate health infrastructure is also reflected in the low Healthcare Access and Quality Index, which was 37.6 for Pakistan in 2016 compared with 41.2 in India, 47.6 in Bangladesh, and 70.6 in Sri Lanka. The Healthcare Access and Quality Index provides a summary measure of healthcare access and quality for a given location. This measure is based on risk-standardized mortality rates or mortality–incidence ratios from causes that, in the presence of quality health care, should not result in death—also known as amenable mortality.12 12. Macroeconomic impacts of the COVID-19 pandemic: growth, exports, remittances, and revenue. The COVID-19 pandemic has hit Pakistan’s growth performance at a critical juncture in its macroeconomic recovery program (Figure 1). The first major channel is manufacturing production, which is affected because of three main reasons:13 (i) demand from high-income countries for manufacturing goods and raw materials is decreasing; (ii) value chains are being disrupted by delays in the delivery of necessary components and supplies from more

10 World Bank. 2019. (1) Resilient Institutions for Sustainable Economy; and (2) Securing Human Investments to Foster

Transformation (SHIFT). Washington, DC. 11 WHO. 2017. World Health Statistics 2017: Monitoring Health for the SDGs. 12 https://ourworldindata.org/grapher/healthcare-access-and-quality-index. 13 ADB’s needs assessment suggests that manufacturing growth might drop to -5% during FY2020.

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technologically advanced countries; and (iii) other factors, including policies (e.g., restrictions on the movement of goods and people), the inability of employees to reach their workplace, or financial constraints, are affecting the normal production process. The current pandemic will affect Pakistan’s economy through other important channels such as lower tourism and business travel. Local tourism, which was growing rapidly in the last few years, will also be badly affected, especially in northern Pakistan during June–August 2020. High employment linkages with the People’s Republic of China (PRC), the United States (US), the European Union, and the Middle East will cause Pakistan’s remittances to decline significantly (Figure 2). Both exports and remittances will decline by $2 billion during FY2020 (Figure 2). A final critical effect of the COVID-19 pandemic is the expected revenue loss during FY2020 (Figure 2), primarily attributed to domestic production disruptions because of the lockdown and the lack of supply of imported raw materials and intermediate goods—primarily from the PRC—which resulted in much lower revenue from custom duties. Total revenue is expected to decline by almost $6 billion and will contribute maximum to Pakistan higher fiscal deficit by two percentage points of GDP during FY2020. As a result of these effects, Pakistan’s economic growth rate is expected to be much lower than the forecast of 2.4%, but the depth of this decline will depend on the intensity and length of the pandemic.

Figure 1: Effect of COVID-19 Pandemic on GDP

ADB = Asian Development Bank, COVID-19 = coronavirus disease, FY = fiscal year, GDP = gross domestic product, IMF= International Monetary Fund. Sources: Asian Development Bank and International Monetary Fund.

Figure 2: Economic Impact of COVID-19

COVID-19 = coronavirus disease. Source: International Monetary Fund.

13. Capital flight, reserves, and exchange rate. Macroeconomic management challenges have worsened because of heightened volatility in global and local equity markets. The flight to safety has caused capital outflows, especially large withdrawals of nonresident holdings in domestic treasuries in March 2020 and a net outflow of more than $150 million in foreign equity investments from 1 March 2020 to 14 April 2020. These outflows have had an impact on foreign exchange reserves and triggered currency depreciations against lead currencies (Figures 3 and 4). Moreover, Pakistan’s access to global financial markets has become more expensive because of an increase in the credit default spread (3.71% increase in the yield on Pakistan’s 10-year Eurobond, which matures in 2021) since mid-March 2020.

2.8

2.6

3.2

5.2 5

.5

3.3

2.4

-1.5

2

ADB IMF

25.59

42.01

22.5823.73

35.66

20.79

10

15

20

25

30

35

40

45

Exports ($

billion)

Revenue ($

billion)

Remittances ($

billion)

Pre-COVID-19 Post-COVID-19

6

Figure 3: Foreign Reserves Trend

SBP = State Bank of Pakistan. Source: State Bank of Pakistan.

Figure 4: Nominal Exchange Rate (PRs/$)

Source: State Bank of Pakistan.

14. Social and poverty impacts of the pandemic. These impacts are leading to large-scale job losses—both in the formal and informal sectors. Consequently, the number of poor people is expected to rise significantly. Of the country’s 37.9 million nonagricultural workers, 27.3 million (72%) work in the informal economy, while only 10.6 million (28%) are employed in the formal economy. The 27.3 million informal economy workers are likely to be the most vulnerable to losing their jobs and in need of income security because of the lockdown. They are mainly engaged in segments that are adversely affected by the shutdown of economic activity. The distribution of Pakistan’s 27.30 million informal economy workers shows that 8.88 million work in wholesale and retail trade, 6.22 million in manufacturing, 4.43 million in construction, 4.37 million in community and social and personal services, and 3.14 million in transport and storage and communications. Depending on the intensity of containment (shorter or longer), total job losses could vary between 2.7 million to 4.5 million.14 Similarly, if the pandemic and containment strategies lead per capita consumption to fall to 10%–20%, the poverty ratio is projected to increase from 22.8% without COVID-19 to 31.1%–40.9% in the post-COVID-19 scenario.15 Therefore, the social cost of the COVID-19 pandemic is expected to be high for the poor and vulnerable over the next 2–3 years, while extremely weak growth prospects indicate economy-wide impacts including higher unemployment. 15. Disproportionately high impact on women. Women suffer disproportionately from the impacts of COVID-19 for three major reasons.16 First, about 22.8% of women are involved in income-generating activities, primarily in the informal low wage market.17 This under-represents women’s employment potential, given that low participation of women in economic activities. Given the concentration of women in the informal economy, they are not protected by social protection programs available for formal women employees. Many women, including domestic workers and those working for small and medium-sized enterprises (SMEs), may be laid off because of the inability of employers to continue paying wages during lockdown. Similarly, analysis of home-based workers shows that Pakistan has 12 million home-based workers who earn about PRs3,000–PRs4,000 per month and will face multidimensional issues such as low

14 ADB staff estimates. 15 ADB staff estimates based on the poverty line of $3.20 per day. 16 See UN Women. Asia and the Pacific. Gendered Impact and Implications of COVID-19 in Pakistan for a more

elaborate discussion. 17 These data are for FY2018. Government of Pakistan, Ministry of Statistics, Pakistan Bureau of Statistics. 2019.

Pakistan Employment Trends 2018. Islamabad.

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income security, the absence of social protection, and the highest economic vulnerability in times of crisis. Second, as of 2017, women have taken out 26% of all microfinance loans. This is low because of the low participation of women in entrepreneurial activities. However, as women’s businesses tend to have lower cash flow and savings, the ability to repay loans may be affected.18 This could result in higher interest rates, repayment penalties, and reduced access to loans. Third, the concentration of medical staff on COVID-19 patients may reduce attention to and resources for maternal and child health.19 Moreover, in these periods of economic stress, the rates of intimate partner violence tend to increase. B. ADB Support Through COVID-19 Pandemic Response Option

16. Government’s countercyclical development expenditure program. The government responded to the COVID-19 pandemic and related economic downturn by announcing a countercyclical development expenditure program of about $7.23 billion (Table 3) to strengthen the health infrastructure and social safety net and provide a countercyclical fiscal stimulus.20 The important measures are discussed in paras. 17–20. 17. Health measures. The Economic Coordination Council (ECC) approved a supplementary grant of $0.60 billion and another for $0.15 billion from the National Disaster Management Authority to mitigate the effect of COVID-19 on the spread of coronavirus by increasing the supply of testing kits, medicines, and personal protective equipment (PPE). 18. The government approved the National Action Plan for COVID-19 Response in March 2020, with short-, medium- and long-term measures. Several immediate actions were taken under this plan (Appendix 6). Under the National Action Plan, the government approved the comprehensive COVID-19 Strategic Preparedness and Response Plan, including $595 million in financing for priority activities, on 23 April 2020. The plan has eight pillars (Appendix 4). Some PRs50 billion ($301 million) was set aside for the initial purchase of equipment and the necessary facilitation of medical workers who are at the forefront of the fight against the virus. Tax rebates and full exemption have been approved for the import of medical instruments (including ventilators), testing kits, PPE, and pharmaceutical machinery. 19. Social safety net measures. The ECC also approved a special package for providing relief to the poor through cash assistance under the Ehsaas (empathy) Program. The package will provide cash grants to 12 million families under the ongoing Kifalat (sponsorship) Program and emergency cash assistance on the recommendation of the district administration. The assistance will be provided for an initial period of 4 months. Households will be identified using the social registry established for the Benazir Income Support Program (BISP) through surveys, using a propensity score matching exercise. Disbursements will be made through Kifalat partner banks after biometric verification. The ECC approved PRs200 billion ($1.2 billion) of cash assistance for daily wage workers in the formal industrial economy who have been laid off as a result of the COVID-19 pandemic.21 Recipients will be paid a minimum wage of PRs17,500 ($105)

18 Nearly 57% of microfinance institution clients are estimated to be experiencing a complete (40%) or partial (17%)

loss of income. Clients have begun asking for loan modifications under the government-mandated moratorium on loan repayments.

19 This can be attributed to inadequate capacity to deliver health services, especially during an emergency. 20 The presence of an economic shock and the pre-COVID-19 pandemic macroeconomic management record and

sound budgetary framework to ensure transparency in expenditure are also part of the eligibility criteria for the CPRO, which have been discussed in Section A.

21 These workers will be selected based on data and information available through the Employees’ Old-Age Benefits Institution, social security departments, and the Workers Welfare Fund. The Ministry of Industries and Production and the Ministry of Labour will carry out detailed screening of beneficiaries to improve targeting.

8

per month for 4 months. It also approved PRs50 billion ($0.3 billion) for Utility Stores Corporation to provide essential food items to vulnerable sections of society at subsidized rates. The ECC also permitted the reduction of different taxes and duties on the import and supply of different food items. The rate of advance tax on the import of different pulses was reduced to 0% from 2%.

Table 3: Government Countercyclical Development Package Description Amount

($ billion) Purpose

Health measures – 0.75 Emergency Relief Fund 0.60 To control COVID-19 spread (procurement of PPE, testing

kits, other essential treatment equipment) Fund for National Disaster Management Authority

0.15 Facilitate relief activities

Social safety net measures – 3.73 Ehsaas Cash Assistance Package 0.44 Cash grant to 12.0 million families (4.5 million women-

headed): PRs3,000 per month for 4 months Monthly cash assistance for daily wage workers

1.20 Cash assistance to 3 million workers: PRs17,500 per month for 4 months

Utility Stores Corporation to provide essential food items

0.30 Provision of essential food items at subsidized rates

Tax break on health and food supplies 0.10 Temporary tax incentive to strengthen supply of health equipment and control food inflation

Ministry of Industries and Production to procure 8.2 million tons of wheat

1.69 Moderate food inflation

Economic stimulus measures – 2.75 FBR for payment of income and sales tax refunds

0.45 Improve liquidity of entrepreneurs to maintain inventory levels

Commerce Division for payment of duty drawback

0.18 Improve liquidity of exporters

Support to industries and exporters 0.60 Kick-start economic and/or entrepreneurial activities and create jobs

Support to agriculture and SMEs 0.60 Provide subsidized inputs to agriculture and subsidized loans to SMEs to create jobs

Allocation for the energy sector 0.92 Delayed collection of arrears from consumers and support to power distribution companies for not revising prices

Total 7.23 COVID-19 = coronavirus disease, FBR = Federal Board of Revenue, PPE = personal protective equipment, SMEs = small and medium-sized enterprises. Note: Numbers may not sum precisely because of rounding. Source: Government of Pakistan, Ministry of Finance.

20. Economic stimulus measures. To provide economic stimulus for restoring economic activities, the ECC approved (i) $0.45 billion for the Federal Board of Revenue to pay back the sales tax and income tax refunds owed over the last 10 years, to help about 676,055 beneficiaries by improving their liquidity position; (ii) $0.18 billion to the Ministry of Commerce to pay back duty drawbacks to textile exporters in the current financial year to improve their liquidity position while their businesses are experiencing a slowdown because of the worldwide outbreak of COVID-19; (iii) support to industries, SMEs, agriculture, and exporters through input subsidies (including bank loans) to revive productive activities; and (iv) $0.92 billion to power distribution companies for not revising energy tariffs until June 2020 and delaying the collection of arrears to a later date. The government also decided to enhance the allocation for the Kamyab Jawan (successful youth) Program to encourage self-employment.22

22 The Prime Minister launched the Kamyab Jawan Program in 2019 to provide soft loans to the country’s youth to

create self-employment opportunities. An amount of PRs100 billion has been allocated for the program to reach 1 million youth across the country.

9

21. The State Bank of Pakistan has also announced measures to stimulate industrial activities (Appendix 4). 22. Debt remains sustainable in medium-term despite additional borrowing. 23 ADB prepared an updated debt sustainability analysis on 30 April 2020. The ADB analysis presents three scenarios: (i) pre-COVID-19, (ii) post-COVID-19 with only additional IMF assistance of $1.4 billion, and (iii) post-COVID-19 with additional financial assistance (as well as IMF assistance) from ADB, the World Bank and the Asian Infrastructure Investment Bank (AIIB). The second and third scenarios (post-COVID-19) are based on the revised growth projections from the World Economic Outlook, showing a sharp decline in the growth rate to -1.5% in FY2020 because of the COVID-19 pandemic. The ADB analysis incorporates an intense fiscal adjustment, which is in line with the current government plans. Under the third scenarios, the primary fiscal balance should have a surplus of 2.7% of GDP by FY2024. The analysis reaches a similar conclusion to the IMF debt sustainability analysis, indicating that the total public debt stock to GDP is sustainable and will reach 73.4% by FY2024 despite additional assistance from ADB, IMF, the World Bank and AIIB. This result, however, critically hinges on four prerequisites: (i) early control of the COVID-19 outbreak; (ii) global growth and employment recovery phase begins; (iii) tax buoyancies return to the pre-COVID levels; and (iv) a swift exit from temporary tax and fiscal incentives and transfer payments implemented as part of the government’s COVID-19 Response Plan. 23. Coordination with the International Monetary Fund and other development partners. ADB has consulted closely with all relevant development partners, including the IMF, on Pakistan’s macroeconomic performance over the last 3 years and the need for providing additional assistance to mitigate the impact of COVID-19 pandemic. ADB also carried out consultations with the World Bank and AIIB for cofinancing of ADB’s assistance for the COVID-19 pandemic in Pakistan (para 26). The IMF, on 16 April 2020, approved emergency financing of $1.386 billion for Pakistan under its Rapid Financing Instrument (RFI) to support the government’s emergency economic and social program to mitigate the impact of the COVID-19 crisis. On 2 April 2020, the World Bank approved a $200 million COVID-19 Emergency Response and Effectiveness Project, which is part of a coordinated effort with ADB’s emergency assistance through parallel financing of the government’s National Emergency Preparedness and Response Plan for COVID-19.24 A COVID-19 donor coordinating group—including ADB, the European Union, United Nations (UN) agencies, the World Bank, and bilateral partners—has met weekly since 24 March 2020 to discuss regular updates on new developments and changes in the COVID-19 response plans. ADB also coordinated with the United Nations Children’s Fund (UNICEF) to procure testing kits and medical equipment through UN registered suppliers. Grant assistance from other bilateral partners (the PRC, the US, Japan, the Department for International Development of the United Kingdom, and German development cooperation through KfW) and the UN is being discussed.25 C. Proposed Program, Impacts, Lessons Learned, and Value Addition

24. ADB’s proposed program. ADB financing under the CARES Program is provided as a budget support to meet gaps in the government’s development financing needs. The design and monitoring framework (DMF) in Appendix 1 presents relevant indicators reflecting the government’s COVID-19 response plan. The selection of the indicators is based on elements of

23 Debt Sustainability Analysis (accessible from the list of linked documents in Appendix 2). 24 ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Grant to the Islamic Republic of Pakistan for the Emergency Assistance for Fighting the COVID-19 Pandemic. Manila.

25 $1 billion is expected from the bilateral donors during FY2020.

10

the pandemic response plan that are a priority for ADB. 25. Impact. The CARES Program is aligned with the following impact: adverse impacts of the COVID-19 pandemic on achieving sustained and inclusive growth mitigated. The effect of the reforms is COVID-19 outbreak more effectively managed and its immediate social and economic damages reduced. The CARES Program is structured around three outputs: (i) measures to arrest COVID-19 introduced, (ii) cash assistance and financial inclusion programs targeting women implemented, and (iii) measures to prevent job losses introduced. 26. The CARES Program will also facilitate parallel financing of $500 million from AIIB and another $500 million from the World Bank’s Securing Human Investments to Foster Transformation (SHIFT) budget support program. AIIB’s parallel financing will support proposed outputs of the CARES Program, while SHIFT will focus on conditional cash transfers, institutional strengthening of the BISP, strengthening rural and primary health care centers, and improving the working conditions of home-based workers. ADB assisted Emergency Assistance Loan (EAL), totaling $300 million and cofinanced by a $200 million loan from the World Bank, mainly targets interventions under two outputs: (i) public health emergency preparedness, and (ii) social protection for the poor and vulnerable women covered by BISP. The EAL and the World Bank project will, therefore, complement each other in providing support for COVID-19 preparedness and responses in the health sector. However, a significant funding gap will remain. The budget support from the CARES Program and parallel financing from AIIB and the SHIFT program will help the government to bridge the financing gap. The CARES Program will also complement the EAL by providing countercyclical fiscal support to mitigate the social and economic impacts of the pandemic. 27. The proposed cash assistance under the government’s countercyclical development program to strengthen the social safety net will cover both women-headed households and women beneficiaries in households not headed by women. The 12 million beneficiaries of the Ehsaas Program will include (i) 4.5 million original BISP beneficiaries (women-headed families); (ii) 4.0 million additional families (outside the original BISP beneficiaries) selected by raising the thresholds (both men- and women-headed families); and (iii) an additional 3.5 million poor families selected through new surveys. The original 4.5 million beneficiaries are covered under ADB’s EAL, additional financing for the Social Protection Development Project,26 and the World Bank’s COVID-19 Emergency Response and Effectiveness Project; and the 7.5 million additional families are covered under the CARES Program27 and parallel financing from AIIB. Thus, these two programs will complement each other. The World Bank’s SHIFT budget support program will support the government’s overarching objective of providing effective social safety net systems and will complement ADB’s budget support under the CARES Program. 28. Lessons learned. In designing the proposed CARES Program, ADB draws on lessons learned from previous interventions in Pakistan, including support to the BISP and the SPBL approved in 2019. Strict monitoring and early identification of problem areas is critical to ensure aid effectiveness. To mitigate these challenges, maintaining close ties with the executing agency and the overall coordination group, especially in a crisis, is critical. This is more relevant when transfer payments are planned for a large group spread across the country, and quite often not easily identifiable. ADB’s experience in designing support for the BISP was very useful. In a crisis

26 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Loan for Additional

Financing to the Islamic Republic of Pakistan for Social Protection Development Project. Manila. 27 The 7.5 million beneficiaries financed under the CARES Program do not overlap with the 2.5 million eligible BISP

beneficiary women financed under the EAL or about 0.7 million eligible BISP beneficiary women financed under the additional financing.

11

such as this, budget support is needed for two important reasons. First, it ensures timely delivery of financial assistance to carry out critical countercyclical measures. Second, the fund flow mechanism through the government’s usual budget systems is effective when TA is provided to strengthen PFM.28 ADB support for trade and energy reform programs reiterated the need for timely and sustained support for capacity development. Many initiatives planned under the COVID-19 Strategic Preparedness and Response Plan will require strong capacity development support from development partners. ADB is engaged with other development partners to support such capacity development. 29. ADB’s value addition. ADB has adopted a medium-term development engagement understanding with the government through several policy-based loans including the SPBL approved in 2019. Many reforms are politically sensitive and will require strong constituency building. Thus, supporting the government in implementing the countercyclical development package, including measures related to the social safety net and health sector initiatives, is the most important value addition of the CARES Program. 30. ADB has been playing an important role in strengthening unconditional cash transfers to poor women-headed households under the BISP through improved targeting and monitoring.29 It has also facilitated (i) women’s financial inclusion in the 2019 SPBL, and (ii) improved access to finance by women entrepreneurs in the Trade and Competitiveness Program.30 In addition, ADB is carrying out intense consultations with the government and other development partners in designing the COVID-19 Strategic Preparedness and Response Plan (para. 26), including through joint formulation with the government and the World Bank of the concept paper for emergency support. ADB will provide TA support to implement the EAL and the CARES Program which will help augment the government’s capacities in monitoring and reporting, including various cash transfer programs. It will also provide TA support to validate the DMF indicators, especially those related to the gender initiatives.31 Thus, ADB is well placed to support the government’s implementation of structural measures to address the spread of COVID-19 and to mitigate its economic impacts on the population. 31. CARES Program is also in line with ADB’s regional approach and response to COVID-19 being articulated through a regional TA.32 Drawing on the lessons learned from implementation of the CARES program, the proposed regional TA will help to build capacity to jointly prepare, mitigate and respond to future regional pandemic threats that can impact population and their livelihood and vulnerabilities. This is being implemented in collaboration with all CAREC member countries two of which also share borders with Pakistan (Afghanistan and the PRC). D. Development Financing Needs and Budget Support

32. The macroeconomic target under the economic recovery program stipulated a fiscal deficit (including grants) to GDP ratio of 7.3% in FY2020. However, the countercyclical development

28 ADB is currently processing a TA to support implementation of the Public Finance Management Act, 2019. 29 ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic

Republic of Pakistan for Social Protection Development Project. Manila; and ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Loan for Additional Financing to the Islamic Republic of Pakistan for Social Protection Development Project. Manila.

30 Footnote 6. 31 The scope of the TA 9246-PAK: Capacity Building of Disaster Risk Management Institutions is expanded with

additional funding to facilitate improved monitoring and evaluation of the CARES program. The TA will support surveys for independent evaluation of the cash transfer programs and gender indicators.

32 ADB. 2020. Addressing Health Threats in Central Asia Regional Economic Cooperation Countries and the Caucasus. Manila. (Forthcoming)

12

expenditure program announced in March 2020 and additional health expenditure, together with the revenue loss, will push the fiscal deficit to almost 9.3% of GDP during FY2020 (about $4.1 billion of additional fiscal deficit) despite reprioritization of expenditure and cuts in development expenditure equal to 1 percentage point of GDP. The IMF has provided an additional $1.386 billion under RFI. However, additional assistance from IMF during FY2020 is expected to be $482 million due to rescheduling of disbursements under EFF. The World Bank is also planning to provide $950 million of additional financial resources in FY2020, including $200 million for the Pandemic Response Emergency Project, approved in April 2020. To help the government to meet its remaining development financing needs, ADB is proposing to provide $852 million in assistance (excluding the planned policy-based loans and the TA) during FY2020, including $500 million of budget support under the CARES Program.33 With this additional budget support, ADB’s total budget support during FY2020 will rise to $2.3 billion, of which $1.8 billion already disbursed during December 2019.34 33. Financing of the fiscal deficit is summarized in Table 4.35 The government has requested a regular loan of $500,000,000 from ADB’s ordinary capital resources to help finance the anticipated deficit from the pandemic response and countercyclical support expenditure needs. The loan will have a 15-year term, including a grace period of 3 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. The average loan maturity using the 30% annuity method is 12.1 years, and there is no maturity premium. The loan size is based on Pakistan’s financing needs, and development spending arising from the development expenditure program.

Table 4: Additional Financing Requirement: FY2020 ($ million) Before COVID-

19 With COVID-19

(ADB Estimates)

Additional Financing

Needs I. Fiscal Deficit 19,096 23,235 4,139

II. External Financing 9,614 13,398 3,784

III. Domestic Financing 9,482 9,837 355

IV. Sources of Additional External Funds

IV a. ADB

852

IV a1. Emergency Assistance Loan

300

IV a2. CARES Program

500

IV a3. National Disaster Risk Management Fund

50

IV a4. Asia Pacific Disaster Response Fund

2

IV b. World Bank

950

33 Of this amount, $30 million is repurposed from the original National Disaster Risk Management Fund Project to

procure medical supplies based on two important conditions: (i) the MNHSRC and the National Institute of Health will confirm the demand for equipment and supplies; and (ii) distribution must follow the direction of the national coordination council, and the NDMA has to provide ADB the distribution of this inventory up to the last mile. As of 10 May, medical equipment (including protective suits) have been distributed to 407 hospitals (of which 165 are public hospitals) across all provinces and federal areas (Appendix 6).

34 Trade and Competitiveness Program ($500 million), Energy Sector Reform and Financial Sustainability Program ($300 million), and Special Policy-Based Loan ($1,000 million). Future budget support programs will be subject to resource availability and project readiness.

35 Large domestic borrowing may lead to financial crowding out of private investment.

13

Before COVID-

19 With COVID-19

(ADB Estimates)

Additional Financing

Needs IV c. International Monetary Fund

482

IV d. Asian Infrastructure Investment Bank

500

IV e. External others (bilateral donors)

1,000

ADB = Asian Development Bank, CARES = COVID-19 Active Response and Expenditure Support Program, COVID-19 = coronavirus disease.

Source: Asian Development Bank and International Monetary Fund. E. Implementation Arrangements

34. The Ministry of Finance (MOF) will be the executing agency for the CARES Program. The government, through the MOF, will monitor budget execution and the flow of funds for countercyclical measures. The CARES Program will be disbursed in a single tranche in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time). The program implementation period is from March 2020 to June 2021. The loan closing date is 30 June 2021. The MOF will appoint a project director to liaise with ADB. The MOF will monitor the activities and expenditures under the CARES Program, submit quarterly reports to ADB, and engage in dialogue with ADB until 6 months after the loan closing date. The government, through the MOF, will submit two additional reports to ADB. These are (i) a status report on the countercyclical development package, covering the utilization of funds, impacts, and the future plan by 10 December 2020; and (ii) a report on the status of the DMF output indicators by May 2021. ADB will provide TA support to strengthen PFM, and to conduct surveys of beneficiaries for independent validation of the cash transfer programs, including appropriate targeting and disbursement (footnote 31).

III. DUE DILIGENCE

A. Governance36

35. Pakistan has extensive centralized legislative and institutional PFM structures, but their effective and efficient implementation is challenged by a decentralized service delivery system. Budget credibility and execution remains a key area of weakness despite progress in reforming the PFM systems, with the implementation of a financial accounting and budgeting system, the introduction of a medium-term budgetary framework, and output-based budgeting. The federal and Khyber Pakhtunkhwa internal audit functions will require improvements and are not yet established in the other provinces. External audits, performed by the constitutionally independent office of the Auditor General of Pakistan, continue to face delays in the execution of audits and the settlement of audit observations. With the support of development partners, including ADB and the World Bank, the government has embarked on a six pillar PFM Reform Strategy, 2018–2027 to improve PFM governance. The PFM Act is expected to instill the requisite risk management, transparency, accountability, and system efficiencies in the PFM cycle. Governance reforms also include the creation of positions within ministries and divisions to strengthen the accounting and internal audit functions. A treasury office and fiscal risk unit will be established within the MOF to strengthen commitment controls, cash management, and fiscal risk management.

36 Detailed PFM assessment in Pakistan can be accessed from the list of supplementary documents.

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B. Poverty and Social

36. The government, in collaboration with development partners including ADB, has followed a two-pronged approach to address the social cost of the economic crisis and subsequent structural adjustment program since 2019: (i) providing financing support to social protection programs that can reduce negative economic impacts on the poor and vulnerable, including women; and (ii) strengthening the government’s capacity to identify and implement important policy actions to ensure equitable and inclusive access to social protection. To this end, it has embarked on major initiatives, e.g., it launched the Ehsaas Program to scale up social protection through the financial and digital inclusion of about 7 million households headed by women; and implemented a housing, health insurance, and welfare program for the poor and people with disabilities. C. Gender

37. The government introduced targeted gender-related reforms in 2019 to strengthen the implementation of the Ehsaas Program. This included (i) targets to support women entrepreneurs’ access to finance; and (ii) a new banking contract for cash transfers under the BISP, which is expected to make cash transfers to women swift, transparent, and safe. These programs have become even more relevant in the current context. For this reason, the government is extending the scope of these programs with the help of ADB and other development partners to address the widespread economic hardship of women, the poor, and vulnerable because of the COVID-19 pandemic. ADB continues to provide support to the BISP through other programs (footnote 29). The CARES Program’s gender categorization is “effective gender mainstreaming”, and it revolves around the following facilitation: (i) support for unconditional cash transfer to women beneficiaries to compensate for work losses and ensure adequate food consumption so that food consumption is restored to the pre-COVID-19 level; (ii) easing access to finance for women entrepreneurs with at least 25% of beneficiaries of the loan under the Kamyab Jawan Program are women entrepreneurs; (iii) promoting financial inclusion among poor women with 6 million women beneficiaries received cash through bank accounts; (iv) unconditional cash transfers to at least 690,000 female daily wage workers ; and (v) providing appropriate PPE to at least 6,000 female medical frontline staff. 38. The new women beneficiaries for the cash transfer program are expected to comprise 50% of the new households (para. 27). Funds will be transferred to them through more than 18,000 branches of Habib Bank and Bank Al-Falah across Pakistan after biometric verification. Targeting and selection of the beneficiaries are carried out carefully using several criteria by the National Database Registration Authority based on information embedded in the Computerized National Identity Card. To the extent the families are women-headed, the funds will be transferred to their account. The benefit of the cash assistance has positive spillovers for the empowerment of women in poor households. D. Safeguards

39. Following ADB’s Safeguard Policy Statement (2009), the CARES Program is classified category C for the environment, involuntary resettlement, and indigenous peoples safeguards. Program activities will be confined to policy and institutional reforms. The program is not expected to have any environmental or social safeguards impacts within the meaning of the Safeguard Policy Statement. The loan proceeds will not be used to finance any activities resulting in physical

15

or economic displacement, as defined by the ADB Safeguard Policy Statement.37 The CARES Program will confirm such exclusions through the MOF’s quarterly monitoring reporting on consolidated expenditures. E. Risks and Mitigating Measures

40. Major risks and mitigating measures are summarized in Table 5 and described in detail in the risk assessment and risk management plan.38

Table 5: Summary of Risks and Mitigating Measures Risks Mitigating Measures COVID-19 pandemic is not contained over 2–3 months, leading to a much larger economic impact, and causes inadequacy of the expenditure package.

Financial and technical support to help improve the capacity to diagnose and treat COVID-19 patients.

The government lacks the technical expertise to implement the countercyclical expenditure package, especially dealing with health sector initiatives and targeting social sector protection programs (outside the coverage of the BISP), causing subdued benefits.

Continuous technical and policy engagement by ADB and other development partners, including the IMF, with the government.

Inadequate internal control systems within the federal and provincial governments and the BISP could reduce the effectiveness of cash transfer targeting under the countercyclical development expenditure package.

Targeting is based on the social registry and other government databases, and payments will require biometric identification. Continuous and coordinated capacity building and monitoring support by the development partners, including strengthening public financial management and implementing enterprise resource planning in the BISP.

ADB = Asian Development Bank, BISP = Benazir Income Support Program, COVID-19 = coronavirus disease, IMF = International Monetary Fund. Source: Asian Development Bank.

IV. ASSURANCES

41. The government has assured ADB that implementation of the CARES Program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan documents.

V. RECOMMENDATION

42. I am satisfied that the proposed Countercyclical Support Facility loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $500,000,000 to the Islamic Republic of Pakistan for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President

1 June 2020

37 Safeguards Assessment Matrix (accessible from the list of linked documents in Appendix 2). 38 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Impacts the program is aligned with Adverse impacts of COVID-19 on the government’s objective of achieving sustained and inclusive growth mitigateda

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms Risks

Effect of the Programb COVID-19 outbreak more effectively managed and its immediate social and economic damages reduced

By June 2021 a. Food consumption of BISP women beneficiaries (excluding the original beneficiaries) reached pre-COVID-19 level (inflation-adjusted) (2019 baseline: pre-COVID-19 food consumption to be determined)c b. COVID-19 testing must reach at least 5,000 per 1 million population (April 2020 baseline: 1465 per 1 million)

a. Sample survey (supported by ADB) b. MNHSRC report on COVID-19

The COVID-19 pandemic is not contained within 2–3 months, leading to a much larger economic impact, and causes inadequacy of the expenditure package.

Outputs 1. Measures to

arrest COVID-19 pandemic introduced

Program Actions and Outputs By December 2020 1.a. The government imported an additional 5,000 ventilators. (2019 baseline: 2,080) 1.b. The government imported an additional 10,000 COVID-19 protective kits for medical staff (of which at least 60% are for female medical staff), consisting of, among others, correctly fitting personal protective equipment, with goggles, face masks and shields, and diapers and menstrual kits, as necessary. (2019 baseline: 0) 1.c. MNHSRC established a centralized age- and sex-disaggregated online coronavirus database management system and one for each province. (2019 baseline: no database exists)

1.a–1.c. MNHSRC Report and database on COVID-19

The government lacks the technical expertise for the implementation of the countercyclical expenditure package, especially dealing with health sector initiatives and targeting social sector protection programs (outside the coverage of BISP), causing subdued benefits.

2. Cash assistance and financial inclusion programs targeting women implemented

2.a. The government disbursed cash assistance totaling $1.20 billion to 3 million daily wage workers, of whom at least 23% are women. (2019 baseline: 0) 2.b. The government disbursed $0.44 billion total of cash grants to 12 million families under the Kifalat Program, of which 50% are women

2.a. Independent survey and Government reports. 2.b. Federal budget statements

Appendix 1 17

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting Mechanisms Risks

beneficiaries from the 7.5 million new families added. (2019 baseline: no cash assistance to the new women beneficiaries). 2.c. Under the Financial Inclusion Strategy, at least 6 million female beneficiaries received money through their bank accounts. (2019 baseline: 4.5 million)

2.c. BISP database, SBP annual report, and independent evaluation through surveys.

3. Measures to prevent job losses introduced.

3.a. At least 25% of beneficiaries of the loan under the Kamyab Jawan Program are women entrepreneurs. (2019 baseline: 12% of the total approval) 3.b. Federal Board of Revenue released PRs75 billion of pending tax refunds. (2019 baseline: 0) 3.c. SBP reduced the capital conservation buffer to 1.5% to increase the size of loanable funds. (2019 baseline: 2.5%)

3.a–3.b Federal budget statements 3.c Notification by SBP

Budget Support ADB: $500 million loan from ordinary capital resources AIIB: $500 million loan World Bank: $500 million

ADB = Asian Development Bank, AIIB = Asian Investment Infrastructure Bank, BISP = Benazir Income Support Programme, COVID-19 = coronavirus disease, MNHSRC = Ministry of National Health Services, Regulation and Coordination, MOF = Ministry of Finance, SBP = State Bank of Pakistan. a Government of Pakistan. 2018. Pakistan One Nation-One Vision 2025. Islamabad. b It is not yet possible to set more specific and realistic effects of the program targets than those presented in the table

because of uncertainties regarding how the outbreak will unfold, its economic effects, the need for government responses to be flexible as the situation evolves, and since new data collection and reporting systems to monitor the crisis are being developed and evolving. Additional indicators to measure the effects will be identified later and used to report on the program’s effectiveness as comprehensively as possible in the project completion report (e.g., new business units set up by the young entrepreneurs and the number of frontline medical staff affected per 1,000 COVID-19 patients treated). Many other important indicators, such as the proportion of women in daily wage workers, women-headed households in the BISP category B database, the total number of women family members in the additional 4.5 million beneficiary families, and women entrepreneurs in the credit guarantee scheme, will be obtained during program implementation.

c The end-line survey to be conducted in 2021, will include questions to determine the pre-COVID-19 crisis level of household food consumption. ADB will facilitate this survey. These new beneficiaries are expected to be 50% of the 4 million new households added in the BISP category B database by raising the threshold. The database for the BISP category B households already exists in the Socio-Economic Registry. This will facilitate the survey. This assessment will be complemented by BISP beneficiary data and analysis of the Household Integrated Economic Survey to understand pre-COVID-19 consumption levels.

Source: Asian Development Bank.

18 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54193-001-3

1. Loan Agreement

2. Development Coordination

3. International Monetary Fund Assessment Letter

4. Summary Poverty Reduction and Social Strategy

5. Risk Assessment and Risk Management Plan

6. List of Ineligible Items

7. Gender Monitoring Matrix

8. Debt Sustainability Analysis

Supplementary Documents

9. Safeguards Assessment Matrix

10. Public Financial Management Systems in Pakistan

Appendix 3 19

DEVELOPMENT POLICY LETTER

20 Appendix 3

Appendix 4 21

COMPLIANCE WITH COVID-19 PANDEMIC RESPONSE OPTION ACCESS CRITERIA

Access Criteria ADB Staff Assessments

1. Adverse Impact of Exogenous Shocks.

As a result of the COVID-19 pandemic economic growth, revenue and employment experienced sharp declines in FY2020. Current estimates forecast a contraction in GDP by 1.5% against a growth of 2.4% projected before the pandemic. Losses in revenue are largely due to decline in domestic production, both on account of lockdown and disruptions in the supply chain of imported raw materials and intermediate goods, primarily from the PRC. Current estimates are that the total revenues will decline by about $6 billion, which will in turn raise the fiscal deficit by about 2% of GDP (as against the pre-COVID-19 target). Pakistan borders Afghanistan, the PRC, India, and the Islamic Republic of Iran. Given the country’s strategic location, regional connectivity is vital for trade, transit, employment in the region and remittances to Pakistan. Pakistan’s trade, tourism and other related sectors are hit hard due to disruptions in regional connectivity. In particular, exports and remittances are expected to sharply decline due to pandemic led slow-down in global economy, especially in case of the PRC, USA, EU and the Middle East. Current estimates indicate that exports and remittances will decline by $2 billion. While the full magnitude of the economic losses will depend on how the outbreak evolves, it is clear that the pandemic has significantly impacted Pakistan’s progress on its economic recovery program initiative.

2. Countercyclical Development Expenditures

The government has taken so far taken two key policy decisions to mitigate the impact of COVID-19 pandemic. First, the government has approved a countercyclical response on 30 March 2020, which comprises initiatives for protecting the poor and vulnerable, including women; augmenting the health sector response; and protecting the productive sectors and small businesses from economic downturn. The total countercyclical development package amounts to $7.23 billion. Second, the government approved a National Action Plan Framework on 13 March 2020, which comprises short-, medium- and long-term measures. Under the Framework, the government prepared and approved the comprehensive COVID-19 Strategic Preparedness and Response Plan,

22 Appendix 4

Access Criteria ADB Staff Assessments

including $595 million in financing for priority activities on 23 April 2020. The plan cover the eight distinct pillars: (i) Country-level Coordination, Planning and Monitoring; (ii) Risk Communication and Community Engagement; (iii) Surveillance, Rapid Response Teams and Case

Investigation; (iv) Points of Entry; (v) Laboratory Network; (vi) Infection Prevention and Control; (vii) Case Management; and (viii) Operational Support and Logistics. In parallel, SBP implemented monetary measures to facilitate revival of economic growth and creation of employment opportunities. Measures include (i) reduction in the policy rate by 525 basis points (from 13.25% to 8%) to induce consumption and investment demand; (ii) reduction in the capital conservation buffer to increase the size of loanable funds; and (iii) raising the retail credit limit for the small and medium enterprises (SMEs). SBP also announced a credit window for the hospitals to purchase equipment and other necessary items to tackle the COVID-19 pandemic and a refinancing scheme for payment of wages and salaries to the workers and employees of business concerns at lower mark up with the objective to prevent them laying off workers.

3. Pre-shock Record of Generally Sound Macroeconomic Management

Since entering the IMF EFF, the government had taken significant progress towards improving its macroeconomic management. Since July 2019, the country had transitioned to a market-determined exchange rate regime, and significantly improved its external position. Budget execution was also improved, which was evident from the primary surplus between July 2019 and February 2020. Improved performance in FY2020 (July 2019 to February 2020) was also evident from a range of other key economic parameters, including primary balance, current account deficit, trade deficit, exchange rate fluctuations etc., when compared against FY2019 (July 2018 to February 2019). Government also enacted Public Finance Management Act in 2019 to improve transparency in fiscal management. Some key provisions of the Act include: Budget Planning: (i) Requires drafting of Budget Strategy Paper;

Appendix 4 23

Access Criteria ADB Staff Assessments

(ii) Annual budget statement requires to include statement of purpose for each demand and statement of contingent liabilities and fiscal risks; and

(iii) Tabling in parliament of Performance Based Budgets. Development Expenditure: (i) Cost and benefit analysis and risk assessment is now

mandatory for projects above a certain threshold (to be defined by the Planning Commission);

(ii) Only approved project cost enters the budget; and (iii) Adequate funds for maintenance of assets (adequacy to

be defined by the Planning Commission). Budget Control (consolidated fund and public account): (i) Finance Division is allowed to withhold funds after prior

approval from the Assembly; and (ii) Creates new position for the Chief Internal Auditor. Treasury Management: (i) Effective cash management system for all public entities

and special purpose funds to Treasury Single Account; (ii) Gradual expansion of budgetary and accounting

framework to all autonomous entities; (iii) Usage of idle cash of the autonomous entities; and (iv) Banks to provide information on government funds held

by the Ministries and other autonomous organizations. Accounting and Reporting: (i) Mid-year review report to be presented to the National

Assembly; and (ii) Year-end government performance monitoring report

from 2021–2022 onwards to be tabled in the National Assembly.

Memorandums of Understanding were also signed with the provinces to adhere to the fiscal targets.

4. Structural Reforms (including Health Response)

The government approved a comprehensive COVID-19 Strategic Preparedness and Response Plan with specific reforms on 23 April 2020. Specific measures include, among others, (i) setup of multi-sectoral, multi-partner coordination mechanisms to support preparedness and response at national and provincial levels; (ii) conduct of initial capacity assessment and risk analysis, including mapping of vulnerable populations by assessing

24 Appendix 4

Access Criteria ADB Staff Assessments

availability of basic necessities; (iii) review of regulatory mechanisms; (iv) conduct of case-based reporting to WHO; (v) setup mechanisms for robust and timely epidemiological and social science data analysis to inform risk assessment and support operational decision making on an ongoing basis; (vi) create awareness in collaboration with existing public health and community-based networks, media, local NGOs, schools, and local governments; (vii) establish access to a designated international COVID-19 reference laboratory; (viii) establish a laboratory network; and (ix) assess infection prevention and control capacity at all levels of healthcare system, including public, private, traditional practices, pharmacies and infection prevention and control during referral of suspected/confirmed COVID-19 cases. The government also took a range of measures to contain the outbreak of the COVID-19 pandemic. These included, among others, enforcing social distancing, repurposing and augmenting medical facilities, reassigning health personnel, procuring test kits and equipment, and suspending air travel (see the details in Appendix 6). The government is in the middle of implementing key structural reforms designed under the economic recovery program (initiated in 2019). These reforms are necessary to consolidate the government’s finances and create the fiscal space. Without adequate fiscal headroom, the government will not be in a position to adequately spend on social and economic infrastructure.

5. Debt Sustainability

ADB’s debt sustainability analysis considered three scenarios: (i) pre-COVID-19 scenario; (ii) with COVID-19 scenario considering only the additional IMF assistance of $1.4 billion; and (iii) with-COVID-19 scenario considering additional financial assistance for COVID-19 (over and above the IMF assistance) from ADB (COVID-19 Active Response and Expenditure Support Program and EAL), from the World Bank and cofinancing from the AIIB. Analysis found that under scenarios (i) and (ii) debt to GDP ratio at end June 2020 was expected to be about 80% and 83.3%, respectively. Under scenario (iii), debt to GDP ratio is expected to increase by 0.8 percentage points to 84.1% by end June 2020. In the medium term, the debt to GDP ratio will decline to about 73.4% in FY2024 in scenario (iii). However, formidable challenge will remain in ensuring that the debt stock remains sustainable. These challenges include: (i) early control of the COVID-19 outbreak; (ii) growth and employment recovery phase begins everywhere

Appendix 4 25

Access Criteria ADB Staff Assessments

including Pakistan; (iii) tax buoyancies return to the pre-COVID-19 levels; and (iv) exit from temporary tax/fiscal incentives and transfer payments. Weak adherence to fiscal consolidated targets and a lower primary surplus will remain the most fundamental risk for debt sustainability (Debt Sustainability Analysis accessible from the list of linked documents in Appendix 2). IMF’s 2020 Debt Sustainability Analysis undertaken in April 2020 had similar findings, though it did not consider fully ADB’s COVID-19 related assistance and its cofinancing from AIIB. IMF Analysis noted that Pakistan’s debt trajectory would remain sustainable provided that the government returns to its fiscal consolidation program as early as possible. IMF Analysis also noted that the debt stock is expected to decline to 73% of GDP by FY2024 (excluding guarantees).

6. Coordination with the IMF and other development partners

ADB has worked closely with all relevant development partners including the IMF in last 3 years, particularly on the macroeconomic challenges. Together with the IMF it has taken a lead role in dialogue and support for the government’s EFF program and has also provided complementary financial support. The World Bank and the AIIB agreed to cofinance the proposed COVID-19 Active Response and Expenditure Support Program and EAL. A COVID-19 donor coordinating group—including ADB, European Union, UN agencies, World Bank, and bilateral partners—has met weekly since 24 March 2020. Regular updates on all new developments and changes in the COVID-19 response plans are discussed. ADB participated, along with the World Bank, WHO, UNDP and other bilateral donors, in preparation of the COVID-19 Strategic Preparedness & Response Plan. ADB also coordinated with UNICEF to procure testing kits and medical equipment through UN registered suppliers.

ADB = Asian Development Bank, AIIB = Asian Infrastructure Investment Bank, COVID-19 = coronavirus disease, EAL = Emergency Assistance Loan, EFF = Extended Fund Facility, EU = European Union, FY = fiscal year, GDP = gross domestic product, IMF = International Monetary Fund, PRC = People’s Republic of China, SBP = State Bank of Pakistan, SMEs = small and medium enterprises, UN = United Nations, UNICEF = United Nations Children’s Fund, UNDP = United Nations Development Programme, USA = United States of America, WHO = World Health Organization. Source: Asian Development Bank.

26 Appendix 5

SELECTED FISCAL REFORMS INITIATED BY GOVERNMENT OF PAKISTAN AFTER JULY 2019

1. Issuance of licenses for the track-and-trace system for excises on cigarettes to improve tax collection and monitoring. 2. Implemented a fully automated sales tax e-refund (FASTER) system to process the payments of pending sales tax refunds. 3. Improved coordinated efforts by provincial tax administration to improve revenue collection, resulting in increase in provincial tax revenue by 18% during first quarter of FY 2020 (y-0-y) and rationalization of spending. 4. Approved plan to establish a new semi-independent national tax authority that will (i) improve tax administration, and (ii) facilitate closer coordination between the Federal and Provincial governments. 5. Initiation of tax policy reforms to simplify the tax laws and regulations, in particular, simplification of corporate income tax and streamlining of exemptions and preferential rates related to sales tax. 6. Establishment of (i) joint working group for recommendations on goods and services tax harmonization, and (ii) tax policy unit to build capacity on tax policy matters. 7. Creation of a cash buffer of 8.5% of gross domestic product at federal level to manage the liquidity. 8. Initiate the process of establishment of Treasury Single Account to recognize the benefits of improved cash management by September 2020. 9. Approved plan to establish a dedicated Treasury and Debt management unit by December 2020 to improve debt and cash management.

Appendix 6 27

SUMMARY OF MEASURES TO CONTROL THE COVID-19 PANDEMIC

Measure Description Repurposing and augmenting medical facilities and personnel

The government has so far established 35 designated tertiary hospitals, 215 isolation centers comprising of 2,942 beds with complete medical facilities, 23,557 quarantine centers and has dedicated 25 laboratories for testing. PRC has supported Pakistan by sending 8 medical teams on 28 March 2020 to assist and train local medical teams. The number of dedicated hospitals, laboratories and quarantine centers increased significantly.1 According to the daily WHO Situation Reports, in mid-March Pakistan was testing approximately 400 people per day using 6 labs. The country is currently testing approximately 10–14,000 people per day. This shows significant increase in testing over the last two months. Pakistan is currently conducting 1,465 tests per million people.

Suspension of air travel Eastern and western borders have been closed except for transit of food and essential items. All international flights operations have been suspended except in bringing back Pakistanis stranded across the world (21 March 2020).

Social distancing Social distancing is being enforced through the State of Emergency. Travel outside homes are restricted and are allowed only to the extent of trips to food stores, pharmacies, medical institutions. When outside, it is compulsory to wear masks and to follow social distancing of at least 1.5 meters.2

Test kits and equipment

Tonnes of medical equipment has been imported from PRC comprising of ventilators, testing kits, face masks, surgical masks, N-95 masks, personal protection equipment (on various date starting on 25 March 2020). As of 12 May, 31,170 N-95 masks, 58,885 protective suits, 4,97,637surgical masks and many other items were distributed to the hospitals in six provinces.

Special young tiger force of volunteers

Prime Minister has also launched a special force of volunteers to assist armed forces, doctors and medical teams in combating the pandemic. Over 5,76,000 volunteers have so far been registered and all the provincial government has started getting the services of tiger force (2 April 2020)

Preparedness plan The Pakistan Preparedness and Response Plan (PPRP) outlines the international assistance required by the government in support of actions to stop transmission of coronavirus disease (COVID-19). It notes the, situation, international plans, outlines the assistance required, coordination mechanisms and reporting arrangements (23 April 2020).3

COVID-19 = coronavirus disease, PRC = People’s Republic of China, WHO = World Health Organization. Source: Ministry of National Health Services, Regulation and Coordination website.

1 http://covid.gov.pk/ 2 https://www.nih.org.pk/wp-content/uploads/2020/03/20200326-Guidelines-for-Social-Distancing-0601.pdf 3 http://mofa.gov.pk/pakistan-launches-initial-us-595-million-preparedness-and-response-plan-to-combat-covid-19/