Tuesday March 21, 2023

Pakistan’s infrastructure spending lowest in region: SBP governor

March 15, 2023

KARACHI: Infrastructure spending in Pakistan is one of the lowest in the region despite being seen as the most effective and crucial accelerator of long-term and sustainable economic growth and development, the central bank governor said on Tuesday.

“Pakistan has enormous infrastructure requirements, but sadly, it lacks the resources to create sustainable infrastructure,” the State Bank of Pakistan (SBP) Governor Jameel Ahmad told the country’s first ever infrastructure summit.

“Our infrastructure spending being at 2.1 percent of GDP [gross domestic product] is amongst the lowest in the region and well below the required national average of 8-10 percent of GDP,” Ahmad added.

It is challenging to finance infrastructure development and its maintenance, which requires huge amount of capital. Therefore, there is demand and supply gap when it comes to the availability of the adequate infrastructure, according to the SBP’s governor.

He said prior to the outbreak of the Covid 19, $80 trillion were estimated to be required upto 2030 to bridge the global infrastructure gap and fight climate change. According to an Islamic financing board working paper on average emerging and developing economies are expected to spend around 4.5 percent of their GDP on new infrastructure projects, he stated.

In absolute terms, Ahmad continued, the required amount to finance the infrastructure investment was estimated to be around $920 billion per annum.

“Pakistan faces acute lack of infrastructure facilities including energies, communication network, water and sanitation, educational institutions and etc.”

Last year, floods have further worsened our aging infrastructure. According to the post disaster needs assessment report, Pakistan requires $16 billion in recovery and reconstruction task. And this even does not include the expected cost for disease, lack of food and clean water.

“Historically, the infrastructure projects have been mainly in the government domain. The government has managed finance and owned these projects. However, considering the fiscal constraint, the government is now encouraging the private sector including the financial institutions to play a greater role in building and maintaining infrastructure sustainable projects,” he said.

Being a proactive regulator and recognising the importance of infrastructure finance in the country the State Bank of Pakistan issued prudential regulations for infrastructure financing in 2016.

In Pakistan, banks and development finance institutions (DFIs) have provided major part of the credit for financing infrastructure projects in the private sector. However, given the significant demand-supply gap where banks and DFIs need to enhance their exposure. The role of the capital markets could not be overemphasised, he said.

The SBP is cognizant of Pakistan vulnerability to environmental challenges, especially climate change. In that background, the SBP has already taken certain steps. For example, green banking guidelines were issued in 2017. These were aimed to reduce the vulnerabilities of banks to environmental and climate risks and to encourage financing for transition and sustainable economy.

“It is worth mentioning that since the issuance of the green banking guidelines banks are in continuous process of implementing the sustainable banking practices in the country,” the governor said.

Recently in November 2022, the SBP has also issued environmental and social risk management implementation manual for banks and financial institutions.

The central bank has introduced financing schemes for renewable energy both in conventional and Shariah-compliant modes. The scheme not only promotes use of clean energy, but also contributes towards the development of sustainable infrastructure in power sector in Pakistan.

The scheme has made remarkable progress with banks providing financing to more than 2,300 projects with cumulative capacity of almost 1,600 megawatt. This progress ultimately contributes to the government’s target to achieve 30 percent in renewable share in the total generation mix under the alternate policy 2019.

Dr Shamshad Akhtar, chairperson, Pakistan Stock Exchange, SSGC and Karandaaz, said, “Pakistan’s fiscal constraints limit public investment in infrastructure, which makes it critical for us to attract private financing.” She expressed her wish to see an infrastructure bank in the country.

Maheen Rehman, CEO, InfraZamin, emphasised the importance of infrastructure development. “As a country of 220 million people, we should be spending 10 percent of our GDP for developing the infrastructure on an annual basis,” she said.

Zafar Masud, president and CEO, the Bank of Punjab, said, "There is a serious problem as far as the asset-liability is concerned; only 1.2 percent of the total deposits are beyond 5 years. If we forecast a 10-year GDP forecast for Pakistan, the requirement is around Rs5 trillion a year for infrastructure financing, which is not possible through the current funding pot.”