Pakistan expects to obtain fresh Chinese loans worth US$1 billion to US$2 billion to help it avert a balance of payments crisis, Pakistani government sources said, in another sign of Islamabad’s growing reliance on Beijing for financial support.
Lending to Pakistan by China and its banks is on track to hit US$5 billion in the fiscal year ending in June, according to recent disclosures by officials and Pakistani Ministry of Finance data reviewed by Reuters.
The ramp-up in China’s lending comes as the US is cutting aid to Pakistan, following a fracture in relations between the on-off allies.
In February, Washington led efforts that saw Pakistan placed on a global terror financing watch list, drawing anger in Islamabad amid fears it would hurt the economy.
The new Chinese loans that are being negotiated would help bolster Pakistan’s rapidly depleting foreign currency reserves, which tumbled to US$10.3 billion last week from US$16.4 billion in May last year.
The talks come after a group of Chinese commercial banks lent US$1 billion to Pakistan’s government in April.
The reserves decline and a sharp widening of Pakistan’s current account deficit have prompted many financial analysts to predict that after the general election, likely in July, Islamabad would need its second IMF bailout since 2013. The last IMF assistance package was worth US$6.7 billion.
Beijing’s attempts to prop up Pakistan’s economy follow a strengthening of political and military ties in the wake of China’s pledge to fund badly needed power and road infrastructure as part of the US$57 billion China-Pakistan Economic Corridor (CPEC), a key cog in Beijing’s vast Belt and Road Initiative.
“I think this month we will get that US$1 billion to US$2 billion,” said a senior Pakistan government official, saying the funds would come from Chinese state-run institutions.
A second government official confirmed Pakistan was in “sensitive” talks with Beijing over extra funding for up to US$2 billion.
Pakistan finance ministry officials did not respond to a request for comment.
China’s finance ministry and central bank, did not immediately respond either.
Although Pakistan’s economic growth has soared to nearly 6 percent, the fastest pace in 13 years, the structural problems with the economy are coming to the fore. It is similar to 2013, when foreign currency reserves dwindled and Pakistan narrowly escaped a full-blown currency crisis.
“The current situation appears to be a replica of what we experienced in 2013, albeit on a slightly larger scale,” said Yaseen Anwar, who was the governor of the central bank, the State Bank of Pakistan (SBP), in 2013.
The darkening macroeconomic outlook prompted the IMF earlier this month to downgrade its economic growth forecast for Pakistan to 4.7 percent for the fiscal year ending in June next year, way below the government’s ambitious target of 6.2 percent.
‘TEMPORARY BRIDGE’
Over the past nine months Pakistan has enacted a series of measures to combat its ballooning current account deficit, including hiking tariffs on more than 200 luxury items and devaluing its currency by about 10 percent.
In the six months until the end of March, Pakistan took bilateral loans worth US$1.2 billion from China, the Pakistani Ministry of Finance document showed.
During this period the government also borrowed about US$1.7 billion in commercial loans, mostly from Chinese banks, finance ministry officials added.
In April, Pakistan’s central bank borrowed another US$1 billion from Chinese commercial banks to buffer its reserves, SBP Governor Tariq Bajwa told the Financial Times.
The Financial Times report was accurate, a spokesman for the central bank said.
The US$1 billion to US$2 billion under discussion would be in addition to that loan.
So far, all the measures appear to have had a limited effect on Pakistan’s economy and foreign exchange reserves continue to plummet.
The collapse of the reserves is mainly due to the central bank’s efforts to maintain an artificially strong rupee over the past few years, analysts say. The currency is now trading at about 115.50/116 to the US dollar, down 9.8 percent in the past six months after two separate devaluations since December.
In the past three weeks, reserves have declined by US$1.2 billion and now stand at two months’ worth of import cover.
“This new [Chinese] money is a temporary bridge until August or September, when a new government will come into office and the country will likely opt for a new IMF program,” said Saad Hashmey, chief economist at brokerage house Topline Securities.
Hashmey and several other economists are predicting another currency devaluation by the end of this year.
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