The government of Pakistan and the Asian Development Bank (ADB) Monday signed Capital Market Development Programme (Subprogram 2) amounting to $300 million.

Omar Ayub Khan, federal minister for Economic Affairs witnessed the signing ceremony between Economic Affairs Division, Government of Pakistan and the ADB.

The bank last week approved the $300 million loan to further develop Pakistan’s capital market, promote private investment in the country, and help to mobilise domestic resources to finance sustainable growth.

The second subprogram of ADB’s Third Capital Market Development Programme builds on institutional and regulatory reforms put in place under the first subprogram approved in 2020. It aims at catalysing institutional investor demand and increasing the range of alternative financial instruments such as derivatives and commodity futures that are available to investors.

Omar Ayub after the Bank approval took to Twitter and stated, “grateful to ADB for approving $300 million for Capital Markets Development Program 2 with consensus. It will facilitate Budgetary Support as well.”

The objective of the program is to (i) strengthen market stability, (ii) enhance market facilitation, (iii) enhance supply-based measures, and (iv) improve demand-based measures for capital market development. It will help develop Pakistan’s capital markets, promote private investment in the country, and mobilize domestic resources to finance sustainable growth.

Omar Ayub said that under Capital Market Development Programme (Subprogram 2), Pakistan has successfully completed 19 prior policy actions in the following areas: Reform area 1: Market stability strengthened. These reforms are designed to promote more robust, resilient, and stable capital markets. Under subprogram 1, amendments were initiated to the SECP Act, 1997 to ensure structural changes in the appointment process of commissioners, and enhance operational efficiency by having commissioners operate as a collegiate body, while the National Finance Stability Council was established to deal with issues in cross regulatory domains. A new broker model was introduced to strengthen the brokerage industry by reducing the likelihood of broker defaults. The new model categorizes brokers according to their net worth and governance requirements, which will ascertain appropriate operational risks to be assumed by the brokers. These reforms continued with follow-up policy actions under subprogram 2, such as approval of the SECP Act amendments by the national assembly, exemption from income tax for the SECP, and notification of a customer custody regime for the brokerage industry.

Reform area 2: Market facilitation enhanced. These reforms will support more efficient resource mobilization and allocation in the economy by expediting the adjudication of enforcement actions, strengthening auditing standards, and enhancing market surveillance systems. Financial infrastructure including well-developed trading platforms and surveillance systems that facilitate efficient information exchange and disclosure, as well as stronger legal framework and resolution mechanisms are necessary to complement institutional environment for development of capital markets.

Reform area 3: Supply measures enhanced. This area focuses on increasing the depth and breadth of the capital markets by promoting alternative financial instruments including derivatives and commodity futures, as well as providing an enabling framework to allow for increased access to financing by growth companies and SOEs. Supply measures under subprogram 2 include (i) facilitate and expand the issuance of sovereign Sukuks; (ii) facilitate listing of SOEs on the PSX to broaden and deepen the capital markets; (iii) promote the introduction of alternative asset classes, such as exchange-traded funds, options, futures, and Shariah-compliant (compliant with Islamic principles) products; and (iv) issuing a framework for women entrepreneur bonds whose proceeds will help finance SMEs owned or led by women. The increased listing of SOEs will also help the government address other binding constraints in SOE management such as poor corporate governance and commercial performance. Reform area 4: Demand measures enhanced. These reform measures aim to enhance the scale of capital markets by not only encouraging investments by institutional and retail investors, but also by strengthening the government debt market. Local currency government bond markets can be a catalyst for the development of corporate bond markets by providing a yield curve benchmark against which to price bonds, market liquidity, and price revelation.

The Minister for Economic Affairs acknowledged the ADB’s continued assistance to the Government of Pakistan. It was further highlighted that Pakistan has recently completed various reforms under ADB’s technical and financial assistance including Trade & Competitiveness Program ($800), Energy Sector Reforms & Financial Sustainability Program ($600) and Capital Market Development Program ($600). The Minister expressed that the Government is also committed to introduce reforms in other areas such as Domestic Resource Mobilization, Climate Change and Public-Private Partnerships. Domestic Resource Mobilization would help the government to create fiscal space through enhanced revenue collection and overcome the challenge of fiscal deficit. The minister further stressed on using digital tools for effective project management and monitoring. At present, 37 ADB-funded development projects amounting to $7.9 billion are under implementation across the country in energy, road & transport, agriculture, urban infrastructure and social sector. During the current fiscal year, the ADB has disbursed over $1.1 billion for various development projects and programs.

Yong Ye, country director, the ADB acknowledged the government of Pakistan’s efforts for completing reforms in capital market. He also discussed the ADB’s ongoing portfolio and future interventions. He highlighted the various issues pertaining to Energy Sector including MFF Power Transmission Enhancement Investment Program II (Tranche 3) and Greater Thal Canal Irrigation Project.

He also shared that ADB will provide support to the EAD for development of e-portal for effective project management.

The story was originally published in Business Recorder on March 29, 2022.