AfDB approves $300m loan to develop Pakistan’s capital markets

ISLAMABAD: The Asian Development Bank (AfDB) on Tuesday approved a $300 million loan to further develop Pakistan’s financial markets, promote private investment in the country and help mobilize domestic resources to finance sustainable growth.

The second sub-programme of the AfDB’s Third Capital Market Development Program builds on the institutional and regulatory reforms put in place under the first sub-programme approved in 2020.

It aims to catalyze demand from institutional investors and increase the range of alternative financial instruments such as derivatives and commodity futures that are available to investors, says a press release issued by the AfDB.

“For several years, the AfDB has been Pakistan’s main development partner in supporting the evolution of its capital markets,” said AfDB Managing Director for Central and West Asia, Yevgeniy Zhukov.

“By making the country’s capital markets more robust and strengthening public debt management, this new program will also help mobilize more domestic resources that support the government’s efforts to finance sustainable growth and respond effectively to crises.

Pakistan’s financial sector is dominated by banks and this lack of diversification increases the risk that the country will not be able to withstand financial shocks and periods of uncertainty. Moreover, the Pakistan Stock Exchange lacks depth in terms of the number of investors accessing it and the number of companies raising capital, while the Pakistani bond market is almost entirely dominated by government bonds.

The AfDB program supports policy actions that will enhance market stability and attract investor capital to Pakistan. These include structural reforms within the Securities and Exchange Commission of Pakistan that will improve governance and regulatory capacity. It supports measures that will strengthen the public debt market and improve market surveillance systems that facilitate the exchange of information.

The program also promotes an enabling environment to accelerate access to finance for growing businesses and public enterprises.

“These reforms will help mobilize financial resources for productive investment, especially by the private sector, and help facilitate economic growth by developing bond and equity capital markets,” said AfDB Economist Sana Masood. “This will help reduce the cost of financial intermediation and stabilize systemic vulnerabilities in the bank-dominated financial system.”