Capital Market Reforms Push Boosted by ADB Loan

The Asian Development Bank (ADB), has agreed to lend $400m to support the Government of Pakistan's efforts for initiating second generation reforms to strengthen the capital markets. The financing will be available as a 'program' loan, with releases in two equal tranches triggered by successful completion of agreed actions. ADB for its part believes that the loan will help turn the domestic equity and bond markets into, as ADB puts it, a viable source of long term financing.

The other interesting part about this program loan relates to its aim of strengthening the Securities & Exchange Corporation (SECP), the somewhat beleaguered regulator of all things corporate in Pakistan. Dogged by accusations of either being utterly lame or incurably intrusive and still suffering from the severe credibility jolts in the wake of its alleged role in the March 2005 stock market crash that saw some Rs.780 billion wiped off the Karachi Stock Exchange, the SECP is still struggling to get back on its feet, so much so that it has been reported that SECP may be replaced by another body by the name of the Financial Services Commission of Pakistan (FSCP). The ADB loan hopes to help make the SECP, or FSCP as the case may be, more independent, accountable and transparent. Sounds good, but is this simply throwing money at the problem?

Perhaps the ADB, my former employer, recognizes that it may have bitten off more than it can chew on this program loan, not only because of its scope but also because of the two year time frame. Reforms don't happen overnight, especially in countries where political commitment is shaky, so two years is tight. In all fairness though, money does act as an incentive to reform, and Pakistan's financial sector reforms have been one of the bright points over the last 7-8 years, especially when it comes to that other regulator, the State Bank of Pakistan, so we may still live to see the day when the lending bears fruit. I just hope that the reforms run deeper than a change in name of the SECP (a regulator is a regulator by any other name) and that the money doesn't end up as a convenient jar to dip into for satiating Pakistan's current appetite/designs for huge infrastructure projects. Program loans provide flexbility in use of funds to Governments but the flipside is that unless sharply defined, a program loan intending to foster reforms, can easily end up bankrolling a stream of projects alone. Oh the woes of fungibility of money!