Pakistan declared on Thursday that it has achieved an agreement with China for a $2.3 billion commercial loan, the first significant foreign inflow in months, and a sign of Beijing’s renewed commitment to Islamabad’s financial stability.
The Chinese government has also dropped its demand that Pakistan does not use the $2.3 billion commercial loan profits. It also agreed to cut the loan’s interest rate by 1%, to roughly 3.8 percent.
The finance ministry breathed a sigh of relief after two months of lobbying to recover the debt, which was repaid in March of this year.
“Good News: The terms and conditions for refinancing of RMB 15 billion deposit by Chinese banks (about US$ 2.3 billion) have been agreed,” tweeted Finance Minister Miftah Ismail on Thursday.
He predicted that the inflow would come soon after both sides had given their regular permissions, which would assist shore up the foreign exchange reserves.
Pakistan had paid back the $2.3 billion commercial loan in March, hoping to be reimbursed in April. However, due to Pakistan’s poor external sector position, China has imposed a stipulation that the money cannot be spent.
Pakistan may make use of the funds, according to Ismail, who also stated that Foreign Minister Bilawal Bhutto and Prime Minister Shehbaz Sharif were instrumental in persuading China to give the loan.
The commercial loan was renewed for three years by the China Development Bank in March 2019 at a six-month China Shanghai Interbank Offered Rate (SHIBOR) + 2.5 percent. Beijing has agreed to cut the rate by 1%, according to a senior finance ministry official.
The lending rate is now around 3.8 percent, which is better than Saudi Arabia charges for its $3 billion deposits, based on the current 6-month SHIBOR rate of 2.32 percent + 1.5 percent.
It was a significant foreign inflow, bringing the country’s foreign exchange reserves back into the double digits. Last week, the reserves fell to $9.7 billion.
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