China agrees to rollover $2b debt on existing terms

China has agreed to rollover a $2 billion debt on existing terms after initially seeking a hike in price, as Pakistan’s policy to maintain foreign exchange reserves through deposits by three countries is becoming costly due to a 118% surge in interest cost.

The Ministry of Finance officials said that an understanding has been reached with Beijing to further extend the repayment period of the $2 billion loan maturing on March 23 –the Pakistan Day.
The Chinese embassy’s response was awaited.

Sources said that China had initially asked to further increase the interest rates on the $2 billion debt. Pakistan is currently paying 7.1% interest rate on the basis of the six-month Secured Overnight Finance Rate (SOFR) plus 1.715%.

The officials said that China has informally communicated its decision to further extend the repayment period and the finance ministry was waiting for a formal response.

Interim Prime Minister Anwaarul Haq Kakar last month formally requested the Chinese government to rollover the maturing loans, according to the officials.

Pakistan paid Rs26.6 billion in interest in the last fiscal year to China, Saudi Arabia, and the United Arab Emirates (UAE) on the $9 billion deposits that these three nations placed with the State Bank of Pakistan, the SBP balance sheet showed.

In the preceding year, the country had paid Rs12.2 billion that within a year jumped by 118%.
The authorities said that a major factor behind the 118% increase in the interest cost was the currency devaluation in the previous fiscal year.

The central bank’s gross official foreign exchange reserves stand at $8 billion. Over the past one decade, Pakistan has adopted a policy to borrow from the regional countries during difficult economic times.

It has not been able to strengthen the repayment capacity and as a result these loans are extended at the time of their maturity.

As of June last year, the regional countries had placed $9 billion in deposits.

Subsequent to a staff-level agreement with the International Monetary Fund, Saudi Arabia and the UAE had further increased their exposure to Pakistan, taking the total tally to $12 billion for the three nations.

The cost of interest on these deposits is now expected to increase substantially for this fiscal year after the increase in the size of the deposits.

The SBP’s balance sheet showed that during the last fiscal year Pakistan paid another amount of Rs42.1 billion to China on account of interest for using a $4.5 billion Chinese trade finance facility for debt purposes.

The SBP report showed that the central bank fully tapped the $4.5 billion, or 30 billion Yuan, trade finance facility available under the China-Pakistan currency swap arrangement.

It added that Rs42.1 billion interest was charged on the outstanding balance at agreed rates, which was Rs5.8 billion or 16% higher than the preceding year.

In rupee terms, the bilateral currency swap value increased from Rs927 billion in the preceding year to Rs1.2 trillion by end of last fiscal year. Pakistan largely utilised the Chinese trade finance facility to repay foreign debt and keep its gross foreign currency reserves at their levels.

The $4.5 billion facility is part of the SBP’s $8 billion in gross official foreign exchange reserves. China has also extended $4 billion worth of SAFE deposits, which are also part of the $8 billion reserves.

Pakistan’s gross reserves are now not enough to service these two Chinese facilities.

The successive governments have failed to tap non-debt creating inflows, which has exposed the country to various risks. The exports are growing at a pace that is not enough to finance the imports. The foreign direct investment remains dry and stagnant.

The political instability and the ad-hoc measures such as disrupting the social media services and the internet are sending negative signals to the foreign investors.

The existing $8 billion worth of official foreign currency reserves are the result of foreign lending despite having the umbrella of the IMF.

The SBP balance sheet also revealed that Pakistan obtained the IMF loans at interest rates ranging from 1.89% to 4.98%. The country paid Rs29.5 billion in interest rate to the IMF during the last fiscal year, according to the report.

Pakistan’s existing IMF programme is expiring in six weeks. The last tranche of $1.2 billion remains undisbursed and it will be the first task of the new finance minister to receive the IMF mission and secure a staff-level agreement in March.

There is still no clarity who will be the next finance minister – a portfolio that the PML-N should have announced days ago aimed at giving clarity to the international financial institutions and local markets.