The rationale for foreign assistance is best explained by a dual gap theory i.e. foreign exchange and domestic savings scarcity phenomena – a characteristic common to all the developing countries including Pakistan. Foreign assistance is thus sought in shape of loans; commodity aid, grant and technical assistance to supplement domestic resources for achieving accelerated growth in selected priority areas.
- Specific to Punjab, these areas include social sectors such as Education and Health, Agriculture and related disciplines and physical infrastructures.
- In Punjab, major agencies extending the loans include ADB, World Bank, Japan Bank for International Cooperation and International Fund for Agriculture Development.
- In the past, Government of the Punjab was mainly receiving soft loan. Soft loans are provided at interest rate of 0.75% - 1.5% with repayment period of 25-35 years. Because of funding constraint, the donors are also offering commercial loans which are relatively on harder condition i.e. these may carry relatively high interest rate with shorter repayment period. Government of Punjab is very selective in accepting commercial loans and these have been negotiated only for infrastructure projects having higher internal rate of return.
- Another category of foreign assistance consists of grant. Major agencies, which provide grants, include United Nations agencies such as UNICEF, WFP, UNDP and UNESCO. DFID, JICA and CIDA have also provided grant assistance.
- Grants may further be in the shape of commodity grant e.g. edible oil. The project specific grant may include equipment, other materials and technical assistance. These grants are in fact a great support to our development efforts.
- Asian Development Bank and World Bank have also arranged grant assistance for project preparation. Under such grants, services of experts are provided who work in close collaboration with relevant Government Departments for preparation of feasibility studies and project documents.
- Now, priority of Government of the Punjab for foreign assistance is shifting from project loans to programme loan/budgetary support programmes. This policy has advantages, as it provides flexibility to the Provincial Government to adjust budget, development programme and facilities financing priority areas, after reaching an agreement with the donors on institutional reforms. This strategy helps to avoid the multiplicity of projects and conflicting and sometimes difficult conditionality of the donors.