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Pak-China loan facility agreement signed

Chinese consortium of banks has also signed $2.3 billion loan agreement with Pakistan and inflow is expected within some days

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On Wednesday, Finance Minister Miftah Ismail tweeted, “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.”

He continued by stating that the inflow was expected within a couple of days, and he extended his gratitude to the Chinese government for facilitating the transaction.

Foreign Minister Bilawal Bhutto-Zardari also thanked the Chinese government in a tweet, “Grateful to President Xi Jinping, Foreign Minister Wang Yi and the people of China.”

Notably, the loans will boost the country’s crisis-hit foreign exchange reserves and will get rid of the blockage from financial pipelines.

Read more: FM Bilawal to visit China for loans

However, on 21st June, the State Bank of Pakistan (SBP) responded to the rumors that the country’s foreign exchange reserves are being dried up, unstable and SBP halted import payments since the bank is facing shortage of US dollars. It clarified, “as of 10th June 2022, #SBP liquid foreign reserves stood at $8.99 billion. These do not include gold reserves and are fully usable for all purposes.”

Furthermore, “#SBP has not stopped import payments and commercial banks have sufficient $ liquidity to execute these payments.” Certainly, around US$4.7 billion have been executed via interbank market during the month so far.

Pakistan repaid the $2.3 billion commercial loan in March, hoping to receive it back in April. However, China stipulated that the funds could not be used due to Pakistan’s weakening external sector position.

Also, China wanted Pakistan to continue its efforts for accomplishing the International Monetary Fund (IMF) loan program. It is also evident that the government opted a tough economic path for the sake of marking IMF and Pakistan government talks a success.

The IMF’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 stated that the budget agreement reached with the IMF would aid in the completion of the legislative process before concluding the current fiscal year on next Thursday.

Highlights of China-Pakistan talks

The China Development Bank extended a three-year commercial loan in March 2019 at a six-month China Shanghai Interbank Offered Rate (SHIBOR) plus 2.5 percent.

In the start of this month,Miftah stated that Beijing consented to lower the rate by 1%. At the current 6-month SHIBOR rate of 2.32% + 1.5%, the lending rate now comes to about 3.8%, which is better than that charged by Saudi Arabia for its $3 billion deposits.

The Chinese government has also dropped its requirement that Pakistan could not use the proceeds of the $2.3 billion commercial loan. It also decided to lower the loan’s interest rate by 1%, to around 3.8 percent. The finance ministry breathed a sigh of relief after lobbying for two months to recover the loan, which it repaid in March of this year.

In addition, Pakistan has requested China for the rollover $2 billion debt. One $1 billion loan will be matured next week, and another $1 billion matures in the fourth week of July. Official from finance ministry was hopeful to get this request accepted by China.

According to officials, Prime Minister Shahbaz Sharif has also formally requested that the Chinese government roll over both maturing loans. China had also rolled over $2 billion in SAFE deposit loans earlier this year in March. However, the finance ministry did not include these $4 billion loan rollovers in the borrowing plan for the next fiscal year.

Miftah had revealed that Pakistan required gross $41 billion foreign loans in the upcoming fiscal year to repay $21 billion maturing loans, finance $16 billion current account deficit and receive additional funds to expand reserves.