Islamabad eyes $3b loan from Beijing

Pakistan also seeks investment in six sectors during PM’s China visit

Shahbaz Rana January 30, 2022


Pakistan has set its sight on a loan to the tune of $3 billion from China to stabilise its dwindling foreign exchange reserves and also seeks an investment bonanza in half a dozen sectors during the visit of Prime Minister Imran Khan to Beijing next week.

Government sources said that in addition to political engagement, the premier would also seek Chinese support in areas of finance, trade and investment.

A final meeting to shape the agenda of the visit would take place on Tuesday -- two days before the scheduled visit, the sources added.

The prime minister will depart for Beijing on February 3 and attend the inaugural session of the Winter Olympics there.

A senior finance ministry official said the government was considering requesting China to approve another loan to the tune of $3 billion in China’s State Administration of Foreign Exchange, known as SAFE deposits.

China has already placed around $11 billion with Pakistan in the shape of commercial loans and foreign exchange reserves support initiatives, including $4 billion in SAFE deposits.

The Chinese money is part of the country’s current official foreign exchange reserves recorded at $16.1 billion.

In the last fiscal year, the country had paid over Rs26 billion in interest cost to China only for using a $4.5 billion Chinese trade finance facility to repay the maturing debt.

Last month, Pakistan also received a Saudi loan of $3 billion, which the country has consumed. The foreign exchange reserves that before the Saudi injection stood at $15.9 billion have already fallen to $16 billion by January 21.

The government would also seek Chinese investment in six priority sectors by highlighting the competitive advantages that the country has in areas of cheap but skilled labour, access to the two richest continents of the world and tax exemptions.

“We will market textile, footwear, pharmaceutical, furniture, agriculture, automobile and information technology sectors for Chinese investment,” said Azfar Ahsan, the chairman of the Board of Investment.

The government is expected to tell the 75 Chinese companies that it provided access to trade routes to the Middle East, Africa and the rest of the world – offering greater incentive in shape of reduction in freight cost.

“Unlike in the past when we would only talk about Pak-Sino friendship being higher than the Himalayas and sweeter than honey, this time we are going prepared to China with a structured approach,” Federal Planning and Development Minister Asad Umar told The Express Tribune.

He added that with the involvement of the China Pakistan Economic Corridor (CPEC) Authority, the government had selected those sectors for foreign investment where there was evidence of huge benefits for Chinese investors.

“The study of selected locations shows substantial benefits in transportation times via CPEC.”

Read Pak-China relationship has grown stronger with time: PM Imran

Sea freight charges often contribute 2% to 10% of unit cost depending on the product. Pakistan offers substantially better and lower sea freight rates to two of the largest import destinations, according to the CPEC Authority officials.

If imported from Pakistan, the freight costs 4,000 Euros per large container to EU destinations compared with 15,000 Euros from China. Similarly, these rates are 6,700 Euros in case of the US East coast against 12,500 Euros from Chinese port to the US.

These rates were also less when compared with India, Bangladesh and Cambodia.

Cost savings on sea freight can materially reduce costs for transacting parties, make product pricing competitive.

Similarly, Pakistani authorities believe that its labour is two times cheaper than that of China. This offers a greater opportunity for relocation of the dying Chinese industries.

However, all these areas and the competitive advantages are already known to the investors but they remain reluctant to bring in “big money” to Pakistan because of its inconsistent fiscal and energy policies.

China has decided to move into more sophisticated and high-tech-driven textile and apparel industry and engage in more value-added functions under its 2021-25 plan.

The government officials claimed that the electricity tariffs were competitive to the regional peers, 9 cents per unit electricity cost compared with 7.1 cents in Indian Punjab and 7.3 cents per unit in Vietnam.

They added that there was 100% exemption on income tax for 10 years, duty-free import of all plant, machinery and equipment and customs and other duty exemptions available for export-oriented raw material.

However, this month the government has withdrawn tax exemptions on the import of machinery and plants, including for Export Promotion Zones.

However, the Pakistani authorities believe that the country’s textile sector presents the most attractive opportunities for Chinese investors in the value-added segment particularly apparel and made-ups, where there is considerable growth potential.

The investors will be able to take advantage of the “best possible” fiscal incentives in its special economic zones, skilled and inexpensive labour, easy availability of raw material, competitive energy tariffs, low freight costs and preferential access to European markets.

The Pakistan Railways has also informed the prime minister about the hiccups in the execution of the $6.8 billion Mainline-I project -- the largest project of the CPEC that has already faced a delay of more than four years.

The sources said the financing modalities of the project had not yet been finalised. Therefore, no major breakthrough was expected on this front.

The government has shown some progress on the lingering issue of about Rs230 billion withheld payments to Chinese power producers and has so far paid Rs50 billion. Another Rs50 billion are also expected to be paid next month.


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