China returns $1 billion loan: SBP

Dar says similar treatment will be applied to $300m Bank of China loan

ISLAMABAD:

Pakistan’s central bank announced on Friday that it has received a $1 billion loan from China, bringing the country’s foreign exchange reserves back to over $4 billion. The government also expects to refinance another commercial loan of $300 million from China in the near future.

Earlier on Friday, Finance Minister Ishaq Dar had announced that Pakistan would receive a $1 billion Chinese commercial loan within 72 hours. Islamabad had repaid this loan in advance after reaching a new agreement with Beijing.

Pakistan made the payment after China agreed to waive the prepayment penalty that is typically charged when a borrower decides to repay ahead of schedule. Pakistan made the $1 billion payment 18 days before the scheduled date.

Speaking at the National Assembly Standing Committee on Finance, Dar stated that Pakistan and China had reached an understanding regarding the repayment and refinancing of the maturing $1.3 billion commercial loans and the $1 billion State Administration of Foreign Exchange (SAFE) deposit.

Referring to a story published in The Express Tribune, Dar confirmed that Pakistan had paid off a $1 billion loan from the China Development Bank (CDB) earlier in the week. He mentioned that if the story had not appeared in the newspaper, the government would have kept the prepayment matter confidential.

According to the finance minister, the State Bank of Pakistan (SBP) would receive the $1 billion either on Friday or the following Monday.

Shortly after Dar’s statement, a diplomat source revealed that China had released the $1 billion on Friday. The source also stated that the $300 million debt would be treated in the same manner. These are old loans that China is refinancing due to Pakistan’s inability to service its debt.

Dar explained that the loan was paid ahead of the June 29th due date as part of a debt management strategy to secure refinancing well before the end of the fiscal year. He also noted that while there is usually a penalty for early payment, China had waived these charges. Dar emphasised that if the $1 billion had been paid on June 29th, it would not have been possible to receive the money back within one day.

The Express Tribune had previously reported that Pakistan had made a $1 billion payment to the China Development Bank (CDB) on Monday.

Pakistan is also scheduled to repay a debt of $300 million to the Bank of China on June 26th. Dar stated that similar treatment would be applied to the Bank of China loan, with early repayment and China returning the amount before June 30th.

The finance minister further mentioned that two loans from SAFE China, totalling $1 billion, would also be rolled over before the end of June.

Pakistan’s gross official foreign exchange reserves had fallen below $3 billion after making the Chinese debt payment. The reserves are expected to increase further, but there will still be some dent due to $900 million debt repayments to multilateral creditors. One day prior, Dar had stated that China understood Pakistan’s complex economic conditions and was willing to provide financial support.

During the current fiscal year, Pakistan was unable to secure any fresh foreign commercial loans. Non-Chinese banks did not extend or refinance their loans due to the worsening economic conditions.

The finance minister reiterated that Pakistan would not default on its sovereign obligations and would continue making payments to all international creditors.

“Pakistan’s assets are solvent and worth more than $6 trillion so people should not be worried about $100 billion external public debt repayments,” said the finance minister.

Dar expressed hope that the exchange rate between the rupee and the dollar would improve to around Rs244, and urged people to stop discussing default.

DESIGN: IBRAHIM YAHYA

He admitted that physical foreign currency smuggling to Afghanistan was still occurring and could not be eliminated. The finance minister mentioned that Afghanistan was meeting its foreign currency requirements from Pakistan through informal channels after the change of government in Kabul in 2021.

Regarding the smuggling of wheat, Dar said that there had been a reduction since the government increased the support price to nearly Rs4,000 per 40 kg. He also noted that due to subsidised gas provision to fertiliser manufacturing plants, urea was cheaper in Pakistan, creating a significant incentive for smuggling.

When asked about the tax collection target of Rs9.2 trillion for the next fiscal year, the finance minister deemed it realistic. He expected the Federal Board of Revenue (FBR) to achieve a growth in collection at least equal to the nominal GDP growth (inflation plus GDP) of 25%. He mentioned that the next fiscal year’s tax target was 28% higher than this year’s revised collection estimate of Rs7.2 trillion, which should not be an issue for the FBR.

However, during the outgoing fiscal year, the FBR only achieved 16% growth in collection despite a nominal growth rate of 38%. This highlights the inefficiency of the tax machinery. As a result, the FBR may not be able to collect even Rs7.1 trillion, despite implementing a mini-budget in February of this year.

 

Published in The Express Tribune, June 17^th, 2023.

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