This amount will be released by tomorrow, which is the last day of the current fiscal year.
ISLAMABAD:
Pakistan and China signed commercial loan agreements worth $3.7 billion this week, pushing foreign exchange reserves back into double digits from a critical level of $8.9 billion last week.
The agreements will also help fulfill the pledge with the IMF to increase total foreign exchange reserves to $14 billion by the end of the current fiscal year.
Official sources told The Express Tribune that the Industrial and Commercial Bank of China and the Bank of China signed agreements worth a total of $1.6 billion on Friday. The amount will be disbursed by tomorrow, the last day of the current fiscal year.
At one point, it seemed that China would not sign the $1.6 billion agreements this week, which resulted in behind-the-scenes economic diplomacy. Sources said that Deputy Prime Minister Ishaq Dar played a key role in finalizing these agreements at the request of the Finance Ministry. Dar began contacts with Chinese authorities on May 19, which resulted in the signing and disbursement of a $2.1 billion commercial loan from a consortium of three Chinese commercial banks this week.
According to sources, a $2.1 billion or RMB 15 billion loan from a consortium of three Chinese commercial banks matured a few days ago, reducing foreign exchange reserves to $8.9 billion. Unlike the $4 billion rollover of Chinese cash deposits, Chinese commercial loans have to be repaid before they can be refinanced on new terms and conditions.
China provided the $2.1 billion in RMB currency, which also appears in the central bank’s foreign exchange reserves. As a result, foreign exchange reserves reached $12.4 billion on Friday, with China Development Bank providing RMB 9 billion, Bank of China providing RMB 3 billion and ICBC providing RMB 3 billion.
According to official sources, the loan is being given for a period of three years. An amount of $1.6 billion was still pending and was being transferred to the next financial year. The sources added that Ishaq Dar was confirmed by Chinese officials on Friday that the remaining two commercial loans have also been finalized and the money will be released soon. In total, Pakistan and China have finalized commercial loan agreements worth $3.7 billion in the past few days.
Friday’s agreement included a $1.3 billion loan from the Industrial and Commercial Bank of China. The ICBC did not provide this loan at a fixed interest rate two years ago, but it works out to be around 7.5 percent. A $300 million loan from the Bank of China was also finalized and will be issued in Chinese currency.
The move to decouple loans from the US dollar is not specific to Pakistan but is part of China’s overall policy to decouple its economy from the US currency. Pakistan relies on Beijing to maintain economic stability, with China consistently rolling over $4 billion in cash deposits, $5.4 billion in commercial loans and $4.3 billion in trade financing facilities.
A $1 billion non-Chinese commercial loan was also disbursed by the Asian Development Bank last week. According to a statement issued by the central bank, the central bank’s reserves fell by $2.7 billion to $9.1 billion during the week ended June 20, mainly due to repayment of commercial loans, while during the current week, the central bank collected $3.1 billion in commercial loans and over $500 million in multilateral loans.
The fall in foreign exchange reserves below $9 billion reflects the weakness in the external sector’s stability. Heavy reliance on foreign loans should be a cause of concern for the government. Sources said that after the central bank’s heavy buying trend, the rupee and dollar exchange rates have started to come under pressure again.
The shortage of foreign currency in the market was also depreciating the rupee and commercial banks were being prevented from opening letters of credit. Finance Minister Muhammad Aurangzeb has said that foreign exchange reserves will be more than $14 billion by the end of the financial year. According to sources, Islamabad has also requested China’s Exim Bank to reschedule government concessional loans, preferential buyer credit, but China did not agree to the rescheduling of credit loans.
