KARACHI: Pakistan has received $700 million loan from China, the central bank said on Friday, providing some relief for the crisis-stricken country as it sought a bailout from the International Monetary Fund to boost its ailing economy.
The State Bank of Pakistan’s chief spokesman confirmed that it received the amount in its account. With the inflow of a fresh $700 million loan, the total SBP foreign exchange reserves rose to $3.9 billion from $3.25 billion as of February 17.
The foreign reserves continued to deplete due to increasing foreign debt repayments and a high current account deficit. A lack of external financing from the IMF and other bilateral and multilateral creditors exerted pressure on the foreign currency reserves. The board of the China Development Bank gave its approval to a loan facility for Pakistan on Wednesday. This was anticipated to increase the nation’s declining foreign exchange reserves.
The country received a $2.3 billion loan from China in June.
Fitch Ratings, which has recently downgraded Pakistan’s credit rating deeper into junk, citing the country’s worsening external liquidity and funding conditions, said falling reserves reflect large, albeit declining, current account deficits, external debt servicing, and earlier forex intervention by the central bank, particularly in the fourth quarter of 2022, when an informal exchange-rate cap appears to have been in place.
“We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap,” it said.
Funding from friendly countries is very critical this time around for the resumption of the IMF programme, as it is one of the important IMF demands. Disbursement from Saudi Arabia, United Arab Emirates, Qatar, and China may be to the tune of over $5 billion (other than already committed or expected rollovers), Topline Securities said in a note on February 13.
The government is hoping that it will reach a staff-level agreement with the IMF as early as this week after taking a number of measures, including tax increases. Nevertheless, no such announcement has been made at this time on this front. Even if an accord between Pakistan and the IMF signs, the global lender would need another one and a half months before calling a board meeting and approving the $1.1 billion tranche.
Given the severe decline in its external position, Pakistan may need to do some sort of debt adjustment even if some IMF or bilateral support materialises. The state of Pakistan’s balance of payments suggests that a crisis has already set underway. Considering this, any funding obtained from bilateral or multilateral sources will need to be used to support letters of credit for imports as well as debt repayment. This suggests that, in the absence of relief for debt repayments or fresh financing, the drain on FX reserves is unlikely to stop.
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