Pak seeks $600 mn in loans from China banks to bridge financing gap: Report

Cash-strapped Pakistan has asked two Chinese banks for $600 million in new loans to bridge a major financing gap as it negotiates with the IMF over the release of the second tranche of a $3 billion bailout package, a report said. media report Wednesday.

Citing sources, The Express Stand The newspaper reported that the federal government was in negotiations with the Industrial and Commercial Bank of China (ICBC) and the Bank of China for a total loan of $600 million. Each bank has been approached for USD 300 million financing.

Negotiations are at an advanced stage and the loans are expected to be received next month, finance ministry officials said.

Finance Ministry spokesman Qamar Abbasi did not respond to questions, the report said.

Abbasi also did not respond to a query on whether Pakistan had applied for another loan from China’s State Administration of Foreign Exchange (SAFE). SAFE has already provided $4 billion in loans, which are rescheduled every year due to Pakistan’s inability to repay them.

Citing diplomatic sources, the newspaper said China and Pakistan were working closely to complete the remaining technical procedures for the $600 million loan.

In recent years, China, Pakistan’s all-weather ally, has become Islamabad’s last hope to meet its emergency financing needs. Every government, including those in government, has reached out to China for bailout funds.

The Chinese have provided loans from SAFE deposits, concessional loans and commercial loans to help Pakistan stabilize its external sector.

In June this year, China helped Pakistan prevent a further decline in its critically low foreign exchange reserves by prematurely adjusting the $1.3 billion repayment.

Pakistan has budgeted $4.5 billion in foreign commercial loans but has not received any financing so far due to poor credit ratings, high risks to debt sustainability and weak macroeconomic conditions.

Since 2017, a larger share of China’s development financing has been bailout loans, rather than for development projects, which were the hallmark of CPEC in its heyday from 2014 to 2017, when new commitments came in large numbers, wrote AidData, a Western research lab. in his latest report.

Since 2000, China has provided $21.2 billion in loans for general budget support, which was 30% of total lending to Pakistan, according to AidData. These loans were provided to prevent bankruptcies and to increase the low foreign exchange reserves.

The government has told the IMF that its $6.5 billion lending plan will depend on macroeconomic conditions.

Pakistani negotiators expressed hope that the successful conclusion of the ongoing talks could boost the country’s low credit ratings, which label Pakistan’s debt as highly risky.

Even if ratings do not improve immediately, we are hopeful that these agencies will improve economic prospects for Pakistan, a senior Pakistani official said on condition of anonymity.

Following the staff-level agreement, Pakistani authorities plan to re-engage non-Chinese banks that have extended loans in the past but are now reluctant due to poor credit ratings and increasing risks to the external sector.

Interim Finance Minister Dr Shamshad Akhtar last month met with representatives of Standard Chartered Bank and Deutsche Bank and the international credit rating agencies on the sidelines of the IMF or International Monetary Fund-World Bank meetings.

Three international credit rating agencies have downgraded Pakistan’s credit rating, raising borrowing costs and creating obstacles to new foreign commercial loans.

Pakistan has also budgeted $1.5 billion in Eurobonds, but the transaction will be subject to obtaining a satisfactory health certificate from the IMF. A stable global interest rate environment and an improvement in Pakistan’s creditworthiness are the prerequisites for entering the global capital markets.

Sources said the IMF also discussed the issue of exchange rate management with the central bank. According to the sources, the IMF said there was a pattern first in the appreciation of the rupee and then in its depreciation over the past two weeks, indicating intervention in the market.

Under the $3 billion IMF bailout deal, Pakistan has committed to the Washington-based global lender maintaining a market-based exchange rate regime. The authorities had to intervene to curb smuggling and hoarding of foreign currency, which led to a successive depreciation in the value of the dollar, which fell to Rs 276 before it rose in value again.

The rupee closed at around Rs 286.40 to a dollar in the interbank market on Tuesday, losing Rs 1.11 in a day.

The central bank briefed the IMF on progress in ending export subsidies and other schemes and capitalizing two undercapitalized private commercial banks, the newspaper said.