Pakistan borrows another $500m from China

Published: November 23, 2017


ISLAMABAD: Pakistan has obtained yet another foreign commercial loan of $500 million from the Industrial and Commercial Bank of China (ICBC), a move aimed at stopping official foreign currency reserves from slipping to dangerous levels.

With the fresh foreign loan that Islamabad contracted on October 11, total foreign commercial borrowings in the first four months of this fiscal year have crossed $1 billion, said sources in the Ministry of Finance.

The finance ministry had informed parliament in June this year that it would obtain $1 billion as commercial loans during 2017-18 that will end in June next year. However, it has already breached the limit with eight months remaining.

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So far, Citibank has given $267 million and Credit Suisse AG loaned $255 million. Pakistan had signed a $450-million short-term foreign commercial loan contract with the Credit Suisse-led consortium in order to boost reserves and pay off a previous loan of Credit Suisse.

Citibank and ICBC are among half a dozen banks that Pakistan has engaged as joint lead managers to float Sukuk and Eurobonds. The road shows for the Sukuk and Eurobond began on Wednesday to raise $2 billion to $3 billion for propping up official foreign currency reserves.

The ICBC had also given $300 million commercial loan in the last fiscal year. The loans were obtained to stop the downward slide of the official foreign currency reserves that currently stand at $13.67 billion. The finance ministry was trying hard that the reserves do not slip below two-and-a-half-month import bill cover.

The official foreign currency reserves have depleted by $2.5 billion since July this year due to a high import bill. The current account deficit during the first four months of the fiscal year widened to over $5 billion – higher by 122% over the same period of the previous fiscal year.

During the past four and a half years, the PML-N government has been subjected to severe criticism for acquiring expensive foreign debt and increasing the overall debt pile. Pakistan’s debt sustainability indicators have worsened in the past one year and its external debt to foreign exchange earnings ratio has further deteriorated, affecting repayment capacity.

Foreign loans are only productive when these are utilised for asset building as this provides a source of earnings, according to a study carried out by renowned economist Dr Kaiser Bengali. His work suggested that with a shift in focus from project to programme loans, the country’s infrastructure is completely ignored and it has started to collapse.

Bengali argued that as long as the rate of return is at least 1% higher than the cost of borrowing, foreign debt does not create trouble in debt management.  However, most of the fresh borrowings are going to meet budget financing needs, which adds to the burden on the government.

During July-October period of this fiscal year, Pakistan obtained $2.3 billion worth of foreign loans, which is equal to 30% of the annual budgetary estimates of $7.6 billion.

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During the first four months (July-October) of this fiscal year, Pakistan obtained new loans amounting to $2.3 billion and overwhelming majority of them are meant for filling the massive budget deficit gap and building foreign currency reserves.

The share of foreign commercial banks in total loans stood at 44% or $1.022 billion. China was the largest source that gave $917 million. Beijing gave $500 million as a commercial loan and another $417 million for project financing.

The Islamic Development Bank was the second largest contributor with $509 million.

The Asian Development Bank disbursed only $161 million for projects’ financing in the first four months, which was about 14% official annual estimate of $1.2 billion. The World Bank released $154 million in July-October period – equal to 15% of the official annual estimates of $1.03 billion.

Published in The Express Tribune, November 23rd, 2017.

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Reader Comments (10)

  • Atif
    Nov 23, 2017 - 10:11AM

    Where will it all end? How can we delay this?Recommend

  • Praful R Shah
    Nov 23, 2017 - 12:14PM

    What will happen if Pakistan can not pay loan with interest to Chinese? Will Pakistan give part of nation to Chinese or give its people as bonded labor?Recommend

  • Komal S
    Nov 23, 2017 - 2:42PM

    @Praful R Shah:

    But then the Chinese bring in their own labour!!Recommend

  • cuban
    Nov 23, 2017 - 3:14PM

    Govt has yet to develop a plan for fixing depleted hard currency and likely has no plan on how to repay all this debt. One thing for sure – borrowing isn’t a long term solution. Recommend

  • jameel malwani
    Nov 23, 2017 - 5:24PM

    Cpec will start by next year and Pakistan’s income will rise exponentially. We will pay all our debts within that year with interest.Recommend

  • HZR
    Nov 23, 2017 - 9:38PM

    No wonder China wants its currency to be used.Maybe it will eventually replace Pakistan currency.Recommend

  • Kapur
    Nov 24, 2017 - 12:45AM

    @jameel malwani: Very possible. But for that to happen you guys will have to first start selling the drugs that you all are apparently ingesting :)Recommend

  • Ayesha Khan
    Nov 24, 2017 - 8:15AM

    The government has to increase it’s income stream ie taxes and this can only happen with efficient tax administration which at present we don’t haveRecommend

  • Dil se
    Nov 24, 2017 - 12:30PM

    China has invested heavily in Zimbabwe.Zimbabwe govt was recently thrown out.Recommend

  • Iqbal
    Nov 24, 2017 - 1:37PM

    Perfect signs of economy heading to bankruptcy.Recommend

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