China to lend Pakistan $2.1b in commercial loan next week

The Ministry of Finance has completed all procedural formalities with the Chinese counterpart for the facility

Shahbaz Rana March 22, 2019
A US Dollar note is seen in this Reuters illustration photo.

ISLAMABAD: China will release $2.1 billion in commercial loan next week, said a top official of Ministry of Finance on Thursday - an injection that will again push the gross official foreign currency reserves to double-digits after almost a year.

The Ministry of Finance has completed all procedural formalities with Chinese counterpart for a facility of RMB 15 billion equivalent to $2.1 billion, stated Advisor to Ministry of Finance Dr Khaqan Najeeb. He said that the funds will be deposited in the State Bank of Pakistan (SBP) account by Monday, March 25.

It is a commercial loan that will be given by three banks of China. These banks are likely to be the Industrial and Commercial Bank of China (ICBC), Bank of China (BoC) and China Development Bank (CDB). Unlike past, when Chinese commercial loans were pegged with London-Interbank Offered Rates, this time China has linked the interest rates with Shanghai Interbank Offered Rates, making it an expensive transaction.

Dr Khaqan claimed that the interest rates were very "competitive" but he did not disclose these rates. In the past, China had given commercial loans in the range of 4 percent to 5 percent.

The advisor said that the $2.1 billion would help further strengthen the foreign exchange reserves and ensure the balance of payments stability. Pakistan has been waiting for the last four months to secure this loan. Last week, Finance Minister Asad Umar had said that agreements with two Chinese banks had been finalized while one was remaining.

The government of Prime Minister Imran Khan has been striving hard to arrange loans from friendly nations aimed at avoiding default on international debt obligations. So far, Saudi Arabia has given $3 billion in cash in addition to signing a deal for oil on deferred payments, also worth $3 billion.

Pakistan arranged $3 billion cash from Saudi Arabia at a 3.2pc interest rate.

The United Arab Emirates also promised to give $3 billion in cash out of which $2 billion have already been transferred. The UAE cash support has been secured for a period of two years at an interest rate of 3pc, according to a written reply by Asad Umar submitted in the Senate.

The UAE was also supposed to give $3.2 billion oil on deferred payments. But Finance Minister Asad Umar said last week that "most probably, the UAE oil facility agreement will not materialise".

Advisor to Prime Minister on Commerce Abdul Razak Dawood said on Thursday that the UAE oil deal was not completely off the table. He maintained that he did not know the reasons for the delay.

An official of the Board of Investment observed that Pakistan had shared the Saudi oil deal with the UAE, which was currently being reviewed.

During the week ending March 15, the SBP said on Thursday that it received an inflow of $1 billion from UAE as the placement of funds. After taking into account outflows relating to external debt and other official payments, SBP reserves increased by US$716 million during the week, standing at $8.8 billion.

With Chinese injection of $2.1 billion, the gross official foreign currency reserves would jump close to $11 billion. Last time, in April 2018, the gross official reserves stood at $11.4 billion.

But these reserves are largely built by securing loans, as the efforts of the past three years to enhance exports are not yielding the desired results.

Before coming into power, PM Khan was critical of taking loans to run the country but due to an extremely low level of foreign currency reserves and financing requirements standing above $25 billion, the premier had to fly to Beijing and other capitals to seek advances.

The pressure on the current account deficit is also gradually reducing, largely because of the compression of imports. The SBP reported on last Friday that current account deficit in February stood at only $356 million, down from $873 million in January. During the period July-February this fiscal year, the current account deficit fell to $8.84 billion, down by 22.5pc from $11.42 billion in the corresponding period last year.