China to provide $2.5-billion loan to Pakistan to boost forex reserves

In July 2018, China deposited $2 billion with the State Bank of Pakistan

China will provide $2.5 billion in loans to Pakistan to boost the foreign exchange reserves of its "all-weather ally", a media report said Saturday.

Pakistan is nearly broke with the drying up of foreign cash reserves and mounting external debt.

The country's $8.12 billion reserves, which are below the minimum level that the International Monetary Fund (IMF) and the World Bank (WB) prescribe, are sufficient to cover only seven weeks of imports.

Due to this, the WB and the Asian Development Bank are not providing loans for budget financing.

"Beijing will place the $2.5 billion in deposits with the central bank," a top Finance Ministry official here told The Express Tribune.

With the anticipated $2.5 billion deposits, China's contribution in this financial year alone would surge to $4.5 billion, the paper said.

Pakistan has struggled to maintain reserves that are not currently sufficient to provide cover to even two months of imports despite receiving $4 billion in loans from two Middle-Eastern countries.

In July, China deposited $2 billion with the State Bank of Pakistan. In the past five years, China has emerged as Pakistan's single largest saviour in times of economic crisis.

The money is coming as part of the government's strategy to secure breathing space until the time its macroeconomic stabilisation measures take effect.

After coming into power, Prime Minister Imran Khan visited China, Saudi Arabia and the UAE to arrange emergency loans to avoid a looming default.

Pakistan has secured $14.5 billion worth of commitments from these three countries that have helped largely bridged the external financing gap of the ongoing financial year.

Before coming into power, Khan was critical of taking loans to run the country but due to an extremely low level of foreign currency reserves and financing requirements standing above $25 billion, he sought loans from other countries.

Saudi Arabia will provide a $6 billion financial assistance package, which included $3 billion in short term loans at an interest rate of 3.18 per cent. Riyadh has already disbursed $3 billion.

The State Bank of Pakistan (SBP) Governor Tariq Bajwa on Thursday said the modalities for $3 billion oil on deferred payments were finalised this week and an agreement would be signed on February 16 during the visit of Saudi Crown Prince Mohammad bin Salman.

The UAE has agreed to provide $3 billion in loans at an interest rate of around 3 per cent and has already disbursed $1 billion. A $3.2 billion worth of oil facility on deferred payment is being awaited.

Pakistan has arranged these deposits for a term of one to three years but these are likely to be rolled over, in case Islamabad faces difficulties to return them, said the sources in the Finance Ministry.

But despite $4 billion inflows from Riyadh and the UAE during the past two months, the gross official foreign currency reserves stayed at only $8.12 billion as of December 25, according to the SBP governor.

However, the SBP governor on Thursday said despite these measures, the current account deficit remained high, standing at $8 billion in six months.

The overall foreign loans disbursements also remained low during first half of the fiscal year, standing at only $2.2 billion from July through December.

The government on Thursday also launched Diaspora bonds at interest rates of 6.25 per cent for three years and 6.75 per cent for five years to arrange funds for balance of payments support.

Finance Minister Asad Umar said he also gave a go ahead to launch two more financial instruments to meet external sector financing requirements. One instrument, likely to be Sukuk bonds (Islamic bonds), could be launched before June, according to the Finance Ministry officials.

The sources said the government is planning to launch foreign currency Sukuk to tap the Islamic markets. There is also a plan to launch $3 billion Euro bonds during the current fiscal year. Asad Umar had postponed it in November after the government arranged loans from the three countries.