Govt takes $450m loan to prop up sliding forex reserves

This is the third commercial loan Pakistan has acquired from Credit Suisse in the past five months

ISLAMABAD: Pakistan has obtained a $450-million short-term foreign commercial loan from a Credit Suisse-led consortium of banks aimed at arresting the slide in official foreign currency reserves that have depleted $4.4 billion in just one year.

The consortium consists of Credit Suisse AG, United Bank Limited and Allied Bank Limited, sources in the Ministry of Finance said on Thursday. They did not disclose the interest rate that the government would pay on the short-term facility.

It is the third loan agreement that Pakistan has signed with Credit Suisse in the past five months, indicating its growing dependence on an unusual source of foreign financing. Earlier, the finance ministry signed two agreements for a loan of $650 million with Credit Suisse on June 7 and May 18.

Spokesman for the finance ministry did not comment on the report.

With the fresh loan, total commercial loans that Pakistan obtained in just three months increased to $703 million, said the sources. These agreements have been signed at a time when independent economists and even the army chief have expressed concern over the “sky-high debt”.

Due to growing vulnerabilities of Pakistan’s economy, the military has now linked security matters with the country’s economy.

On the back of fresh foreign injection, the official foreign currency reserves of the State Bank of Pakistan (SBP) increased to $14.158 billion as of October 13. The SBP reported on Thursday that there was a net increase of $370 million in the foreign currency reserves. This appeared to be the result of borrowing from Credit Suisse.

The government has taken these loans after failing to attract sufficient non-debt creating inflows, like enhanced exports and foreign direct investments, for meeting its external financing requirements.

The foreign commercial borrowing has temporarily halted the downward slide in the foreign currency reserves, which dropped $4.4 billion in the past one year due to fast drying up of foreign currency inflows through regular channels and a major dip in exports and remittances.

The sources said due to growing dependence on foreign commercial loans, Pakistan’s external debt servicing has increased significantly in the past three years when the PML-N government started extensively taking short-term loans from commercial banks.

They said Pakistan would require at least $5.8 billion for foreign debt servicing in the current fiscal year 2017-18. This includes $4.5 billion in principal repayments and $1.3 billion in interest cost. The country is returning these loans by taking more loans.

Early this month, the federal cabinet regularised nearly $2 billion in foreign commercial loans that the government had obtained during the second half (January-June) of the last fiscal year without prior approval of the cabinet.

These borrowings were part of a record-breaking $4.4 billion in short-term foreign commercial borrowing by the PML-N government during fiscal year 2016-17 (FY17) that ended on June 30, 2017. Of this, $2.3 billion came from Chinese financial institutions alone.

Overall, the government of former prime minister Nawaz Sharif had obtained a whopping $35 billion in new loans during his four-year tenure to repay maturing debt and keep official foreign currency reserves at a level which could give a sense of economic stability to investors.

About $17 billion or nearly half of the total loans obtained from July 2013 to June 2017 were utilised to repay the previous debt. The government added net $18 billion to the country’s total external debt and liabilities - the highest amount added by any government during its tenure.

Since 2008-09, Pakistan has added $43 billion in external debt, which was more than half of the external debt and liabilities that have been added since independence, according to Dr Ashfaque Hasan Khan, former director general of debt, Ministry of Finance.

He said the balance of payments position was in a precarious condition and the current account deficit will likely touch $18 billion by the end of current fiscal year.

Published in The Express Tribune, October 20^th, 2017.

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