China Extends $2 Billion Loan Repayment for Pakistan

Pakistan has received a one-year extension on a $2 billion loan from China that was due to mature in March, according to sources in the Ministry of Finance. The move will provide some breathing space for the cash-strapped country, which is facing a severe balance of payments crisis and negotiating with the International Monetary Fund (IMF) for the release of the next tranche of a $6 billion bailout package.

China had unofficially conveyed its decision to roll over the loan on the existing terms, which carry a 7.1% interest rate. A formal confirmation is expected soon, they added. Pakistan had borrowed $2 billion from China in 2023 as part of a $9 billion deposit that China, Saudi Arabia, and the United Arab Emirates (UAE) had placed with the State Bank of Pakistan (SBP) to shore up its foreign reserves.

Pakistan paid Rs26.6 billion in interest on these deposits in the last fiscal year, the sources said. The rollover of the Chinese loan will help the SBP maintain its foreign reserves at around $8 billion, which are barely enough to cover three weeks of imports.

The extension of the loan came after caretaker Prime Minister Anwaar-ul-Haq Kakar wrote a letter to his Chinese counterpart Li Qiang last month, requesting a one-year deferment of the debt repayment. In his letter, PM Kakar also thanked China for its financial support and said that China had given a loan to Pakistan in a difficult economic situation.

Pakistan is facing its worst economic crisis in decades, with soaring inflation, stagnant growth, and mounting debt. The country was hit hard by the coronavirus pandemic in 2020, which disrupted economic activity and reduced tax revenues. The country also suffered from floods in 2022, which caused an estimated $30 billion in damage and lost output.

Pakistan is seeking to revive its economy with the help of the IMF, which approved a $6 billion loan program in 2019. However, the IMF has set strict conditions for the disbursement of the funds, such as raising taxes, reforming the energy sector, and securing external financing. Pakistan has so far received $4.6 billion from the IMF and is awaiting the release of the next tranche of $1.1 billion.

The rollover of the Chinese loan will ease the pressure on Pakistan to meet its external debt obligations, which amount to about $100 billion, of which nearly one-third is owed to China and Chinese commercial banks. China is Pakistan’s largest single creditor and a strategic partner, with investments in infrastructure, energy, and defense projects under the China-Pakistan Economic Corridor (CPEC).

China has repeatedly expressed its willingness to assist Pakistan in overcoming its economic challenges. Last year, China rolled over more than $2 billion in debt to Pakistan and pledged to provide fresh funds to help Islamabad meet two crucial debt repayments in June worth $2.3 billion. China’s Foreign Minister Qin Gang also reaffirmed Beijing’s support for Pakistan during his visit to the country in May last year.

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