China has signed a $2.3 billion commercial loan deal with Pakistan to boost its sliding foreign exchange reserves, as the government waits for the rollover of three more maturing loans totalling $2 billion.
“The Chinese consortium of banks has today signed the RMB 15 billion ($2.3 billion) loan facility agreement after it was signed by the Pakistani side yesterday”, Finance Minister Miftah Ismail tweeted on Wednesday.
He added that the inflow was expected within a couple of days, expressing his gratitude to the Chinese government for facilitating this transaction.
The official foreign exchange reserves remain in single digits, standing at $8.9 billion. However, these loans will give it a boost once Chinese banks transfer the money, opening blocked financing pipelines.
The Chinese consortium of banks has today signed the RMB 15 billion (~$2.3 billion) loan facility agreement after it was signed by the Pakistani side yesterday. Inflow is expected within a couple of days. We thank the Chinese government for facilitating this transaction.
— Miftah Ismail (@MiftahIsmail) June 22, 2022
A day earlier, the State Bank of Pakistan rebutted rumours that its liquid foreign exchange reserves of $8.9 billion had not dried up and were “fully usable”.
Pakistan had repaid the $2.3 billion commercial loan in March in the hope to get it back in April. However, China had placed a condition that the money could not be used due to weakening of the external sector position of Pakistan.
China also wanted Pakistan to remain committed to the International Monetary Fund (IMF) loan programme.
On Tuesday, the finance minister had announced a deal with the IMF on budget numbers, aligning the figures with the global lender’s assessments of revenues and expenditures for the next fiscal year.
The government has also accepted some of the tough conditions for the sake of reaching a deal with the IMF.
The global lender’s Resident Representative Esther Perez said on Wednesday in a brief statement that “discussions between the IMF staff and the authorities on policies to strengthen macroeconomic stability in the coming year continue, and important progress has been made over the fiscal year 2022-23 budget”.
However, finance ministry officials said that the understanding reached with the IMF on the budget would help complete the legislation process before the end of the ongoing fiscal year on next Thursday.
In March 2019, the China Development Bank had extended a commercial loan for three years at a six-month China Shanghai Interbank Offered Rate (SHIBOR) plus 2.5%.
Earlier this month, Miftah had said that Beijing agreed to reduce the rate by 1%. At the current 6-month SHIBOR rate of 2.32% + 1.5%, the lending rate now comes to around 3.8%, which is better than that charged by Saudi Arabia for its $3 billion deposits.
The Chinese government has also withdrawn its condition that Pakistan could not use the proceeds of the $2.3 billion commercial loan. It also agreed to reduce the interest rate on the loan by 1% to around 3.8%. This has provided a sigh of relief to the finance ministry that lobbied for two months to get back the loan, which it repaid in March this year.
Pakistan has made another request to China for the rollover of $2 billion worth of debt. Out of this, two loans valuing $1 billion are maturing next week and another $1 billion in the fourth week of July.
A senior official of the finance ministry hoped to receive “positive news” from China in the shape of rollover of these maturing loans.
Prime Minister Shehbaz Sharif has already formally requested the Chinese government to roll over both the maturing loans, according to officials. Earlier in March this year, China had also rolled over $2 billion in SAFE deposit loans.
However, the finance ministry did not show these $4 billion loan rollovers in the next fiscal year’s borrowing plan.
Budget books showed that the total external receipts were estimated at $17 billion, or Rs3.13 trillion, for fiscal year 2022-23. The Budget documents showed that Pakistan had planned to float $2 billion worth of international Sukuk and Eurobond in the next fiscal year.
It can get a better price only if the IMF programme is restored as foreign investors fear default on payments of previous bonds. The cabinet on Tuesday had approved to pledge six more national assets to float domestic and international Sukuk bonds.
Miftah had said that Pakistan needed gross $41 billion foreign loans in the next fiscal year to repay $21 billion maturing loans, finance $16 billion current account deficit and receive additional funds to improve reserves.
Also read: ‘Broad agreement’ reached with IMF to end uncertainty
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