ISLAMABAD:
China is likely to roll over $500 million of Pakistan’s debt, a move aimed at stabilising foreign currency reserves and protecting the rupee from further decline against the dollar as the country prepares to return first tranche of International Monetary Fund’s (IMF) loan.
This is for the second time when China is providing some cushion to Pakistan as earlier Beijing has struck a currency swap deal worth $1.5 billion which will also help stabilise foreign currency reserves.
Sources in the finance ministry told The Express Tribune that the deal for debt rollover would likely be signed before the end of February. China had provided this loan in the wake of balance of payments difficulties in late 2008 when foreign reserves of the central bank dropped significantly and were barely enough to foot two-month import bill.
This will be the second debt rescheduling in 2012 as the Islamic Development Bank has already rolled over $576 million debt for two years. These moves are likely to ease pressure on the country’s foreign exchange reserves just before the start of loan repayments to the IMF from February.
In the current fiscal year to June 2012, the government will retire $1.4 billion of IMF debt including interest payment of $188.5 million. First tranche of roughly $600 million will be repaid in February while the remaining will be returned in April.
In the next fiscal year, the country will pay back $3.1 billion to the IMF. However, the largest chunk of $3.5 billion will be returned in 2014.
From 2008 to 2010, the government borrowed $8.9 billion from the IMF and will return the money from 2012 through 2016.
What we will receive
and pay
In 2011-12, the government has estimated foreign inflows of $3.7 billion while payment of liabilities is estimated at $2.7 billion. Based on these assumptions, the finance ministry hopes that foreign exchange reserves will not fall below $16.5 billion.
However, the State Bank of Pakistan fears that most of the foreign inflows will not come and foreign reserves can fall to as low as $12 billion.
If foreign inflows remain below expectations, the debt rollovers are likely to provide breathing space to the government.
In the first five months (July-November) of current fiscal year, Pakistan received $823 million in new loans. The suspension of the IMF programme following delay in implementing key energy and tax reforms has impeded flow of loans from other lenders as well.
On the other side, the US has slowed down releases under the $7.5 billion five-year Kerry-Lugar package and has completely stopped disbursement of Coalition Support Fund (CSF) for compensating Pakistan for expenditures made in the fight against militants.
The outstanding CSF amount is $2.5 billion despite the fact that since Osama bin Laden’s killing in Abbottabad in a US raid in May, Pakistan has not billed the expenses. Slowdown in foreign inflows and maturing debt have sparked volatility in the currency market, with the rupee trading above 90 to a dollar. Over the last six months, the currency has lost 5 per cent of value.
Published in The Express Tribune, January 20th, 2012.
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