Govt rejects $490m loan over cost

Debt office balked at 8% all-in cost vs 6% target; financing needs hit 20% of GDP

ISLAMABAD:

Pakistan has turned down a $490 million commercial loan proposal by the Islamic Development Bank (IsDB) Group due to higher interest rates, amid elevated gross financing needs (GFN) that the finance ministry has estimated at around 20% of the size of the nation's economy.

The facility was refused a couple of months after Pakistan took a $300 million loan from United Bank Limited, which originated the amount from Bahrain and Dubai in August this year, according to the sources. The government obtained these loans by waiving income tax on the profits the bank would earn by extending them.

The decision to turn down the offer from the IsDB's arm, the International Islamic Trade Finance Corporation (ITFC), was taken last week, according to government officials. The facility had been offered for a period of one year.

The finance ministry spokesperson did not respond to a request for comment about the government's decision.

The officials said the Debt Management Office (DMO) of the finance ministry took the decision to turn down the loan due to higher cost. The debt office has been working without a permanent director general since January this year.

The finance ministry has now asked the Economic Affairs Division to look for a new loan facility, either from the ITFC or any other source at competitive rates, the sources added.

Pakistan's GFN, including external requirements, remain high as the International Monetary Fund (IMF) has now projected a current account deficit that is higher than the official estimates. The IMF's latest report projected the current account deficit at 1% of gross domestic product (GDP), or nearly $4.5 billion. This is at least $1.5 billion higher than the $2.5 billion to $3 billion figure pitched by the Pakistani authorities during recently concluded talks. In the same report released this week, the IMF showed Pakistan's GFN around 22% of GDP for the last fiscal year, which finance ministry officials found on the higher side.

However, according to the finance ministry's annual borrowing plan for fiscal year 2026-27, "total gross financing needs are projected at Rs28.647 trillion, approximately 20% of GDP".

This is inclusive of the total federal fiscal deficit of Rs7 trillion and, after adding domestic and external maturities, of over Rs21 trillion, according to the finance ministry's own report based on original budget estimates.

The same report noted that net external financing is projected at Rs813 billion, equivalent to $2.8 billion. The net amount is after repaying maturing debts, which suggests the actual borrowings will be higher than this amount.

The finance ministry is betting on inflows from multilateral lenders that are expected to be the primary external funding source for $1.6 billion net lending to meet these requirements.

Regarding the ITFC's $490 million facility, the debt office was of the view that the interest rate offered by the lender was considerably high, as it had hoped for an interest cost of around 6%. The sources said the ITFC's offered all-in cost of about 8% was higher than the December 2027 maturing bond, which was trading at 6.1%. In September this year, the government raised $3 billion through Eurobonds at interest rates higher than those Pakistan paid in 2021 against five- and 10-year Eurobonds, showing a comparison of both transactions. The key reason behind relatively low interest rates on the debt raised in 2021 was that US Treasury rates were very low, ranging from 1% on five-year bonds to 1.64% on 10-year bonds.

Current US Treasury rates were over 5% due to prevailing global geopolitical and consequent economic uncertainties. The finance ministry stated that it raised $1.75 billion through a five-and-a-half-year Eurobond at a coupon rate of 7.5%.

The face value interest rate on the five-year Pakistan Muslim League-Nawaz (PML-N) Eurobond was also 3% higher than the comparative US Treasury bond. During the Pakistan Tehreek-e-Insaf's (PTI) time, it was 5% higher than the comparative US rates. The actual interest rate on the PML-N five-year transaction was 7.75%.

The finance ministry also raised $1.25 billion through a 10-year Eurobond at a 7.9% face value interest rate.

The sources said the government has also processed the income tax exemption for a foreign-origin commercial loan of $300 million.

A finance ministry official said foreign commercial loan facilities have been offered on the condition that taxes applicable in Pakistan will not be borne by the lenders, and that the tax was either to be borne by the government or a tax exemption granted.

They said the law empowers the federal cabinet to waive these taxes, which eventually have to be paid from the budget, as it was direct borrowing by the finance ministry.