China rolls over $2bn loan to Pakistan: Shamshad Akhtar
Business
The amount was due in March and has been extended for one year
ISLAMABAD (Reuters/Web Desk) – China has rolled over a $2 billion loan to Pakistan, caretaker finance minister Shamshad Akhtar confirmed in a response to Reuters on Thursday.
The $2 billion loan was due in March and has been extended for one year, it was earlier reported in media, citing sources in the Pakistan finance ministry. Beijing had communicated the decision to Islamabad, it added.
Pakistan's cash-strapped economy is struggling to stabilise from a financial crisis and secured a $3 billion standby arrangement from the International Monetary Fund last summer.
The vulnerable external position means that securing financing from multilateral and bilateral partners will be one of the most urgent issues facing the next government, ratings agency Fitch said last week.
It said the close outcome of elections and resulting near-term political uncertainty may complicate the country’s efforts to secure a financing agreement with the IMF, to succeed the Stand-By Arrangement (SBA) expiring in March 2024.
“A new deal is key to the country’s credit profile, and we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default,” one of the top global rating agency said in a report.
Citing the recent improvement in the country’s foreign reserves, Fitch said the trend was low relative to projected external funding needs, “which we expect will continue to exceed reserves for at least the next few years”.
“We estimate Pakistan met less than half of its $18 billion funding plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine rollovers of bilateral debt.”
In this scenario, Fitch says, “The sovereign’s vulnerable external position means that securing financing from multilateral and bilateral partners will be one of the most urgent issues on the agenda for the next government.”
About the future government, the rating agency said negotiating a successor deal to the SBA and adhering to the policy commitments under it will be critical to most other external financing flows, not just from the IMF, and will strongly influence the country’s economic trajectory in the longer term.”
Moreover, the Fitch predicts even more stringent IMF conditions in the future arrangement, “which may be resisted by entrenched vested interests in Pakistan”.
“Nonetheless, we assume any resistance will be overcome, given the acute nature of the country’s economic challenges and the limited alternatives.”
At the same time, Fitch sees delay in finalising a deal with the IMF thanks to political instability as we well as assistance from other multilateral and bilateral partners and hampering the implementation of reforms [a reference to privatisation and market-based tariffs].
“We believe a government will assume office and engage with the IMF relatively quickly, but risks to political stability are likely to remain high. Public discontent could rise further if PTI remains sidelined – the election revealed continued strong public support for the party.”
Fitch noted that Pakistan have a poor record of completing IMF programmes – less than half of its 24 IMF programmes have disbursed more than 75 per cent of the funding available. “However, there has been fair progress on targets under the current SBA. Moreover, we perceive there is stronger consensus within Pakistan on the need for reform, which could facilitate the implementation of a successor arrangement.”
The report also lists risks that Pakistan may face. “Policy risks could rise again over time if external liquidity pressures ease, either as a result of initial reform successes or developments outside Pakistan, such as a substantial drop in oil prices.”
“This could lead to the renewed build-up of economic and external imbalances. We believe Pakistan’s external finances will remain structurally weak until and unless it develops a private sector that can generate greater significantly more export income, attract FDI or reduce import dependence.”
