Cash-strapped Pakistan has sought $600 million in fresh loans from two Chinese banks as it negotiates with the IMF for the release of the second tranche of a $3 billion bailout package. According to a report by The Express Tribune newspaper, the Pakistan government is 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 $300 million in financing.
Negotiations are at an advanced stage and loans are expected to be received by next month, the report added.
In recent years, China, Pakistan’s all-weather ally, has become its last hope for meeting emergency financing needs. The Chinese have been extending loans from SAFE deposits, concessionary loans, and commercial loans to help Pakistan’s economy.
In June this year, China prevented a further fall in Pakistan’s critically low foreign currency reserves by prematurely adjusting the repayment of $1.3 billion.
Pakistan has budgeted $4.5 billion in foreign commercial loans but it has so far not received any financing due to poor credit ratings, high risks to debt sustainability, and a weak macroeconomic situation.
Since 2000, China has given $21.2 billion in loans in general budget support, which was 30% of the total lending to Pakistan, according to AidData. These loans were taken to avoid default and push the low foreign currency reserves a bit higher.
The government has informed the IMF that its $6.5 billion borrowing plan hinges on the macroeconomic conditions.
Pakistani negotiators voiced hope that the successful completion of the ongoing talks could give a boost to the country’s low credit ratings, which describe Pakistani debt as highly risky.
Three international credit rating agencies have downgraded Pakistan, which has increased its cost of borrowing and created obstacles in the way of arranging new foreign commercial loans.
A stable global interest rate environment and improvement in Pakistan’s credit rating are the prerequisites for venturing into the world capital markets.
Under the $3 billion IMF bailout deal, Pakistan has committed to the Washington-based global lender to have a market-based exchange rate regime. Authorities had to intervene to curb smuggling and hoarding of foreign currency, which led to a sequential reduction in the dollar value that slipped to ₹276 before appreciating again.
Source : Mint