$1bn received from China: State Bank

ISLAMABAD / KARACHI: Finance Minister Ishaq Dar said Friday that China has refinanced a recently paid-back $1 billion commercial loan.

A State Bank of Pakistan spokesman has also confirmed they received the Chinese loan Friday night.

Earlier, while briefing the National Assembly Standing Committee on Finance here at the Parliament House on Friday, Ishaq Dar said: “Within a day or two, Pakistan would get re-financing of a $1 billion commercial loan from China, which was paid back a few days ago.”

Pakistan on Friday got $1 billion inflows from China as refinancing of a loan that was paid earlier this week, a respite for the country that is teetering on a debt default as the stalled International Monetary Fund bailout programme nears expiry. “$1 billion has been received from China,” the State Bank of Pakistan confirmed via a text message. As the government on Tuesday had the first high-level virtual conference with the International Monetary Fund (IMF) in its final effort to receive a $1.2 billion tranche, Pakistan paid off a $1 billion commercial loan from China on Monday.

The gross official currency reserves fell below $3 billion as a result of the loan repayment. The loan had a June 29 due date. Islamabad chose to pay in advance in order to get the money back before the fiscal year’s deadline of June 30. Along with the government’s efforts to secure foreign currency from all possible sources, a repayment has also been made.

“This is a positive sign as Pakistan’s reserves dropped below $3 billion after the commercial loan payment to China,” said Fahad Rauf, the head of research at Ismail Iqbal Securities. “It is a sigh of relief that China has quickly refinanced the loan,” Rauf added.

In the week ending June 9, Pakistan’s central bank’s foreign exchange reserves rose by $107 million to $4.0 billion. However, with the receiving of fresh inflows, the reserves held by the SBP have increased to $5 billion.

Pakistan could default without an IMF programme due to its extremely low reserves, according to international rating agencies and economists.

For the fiscal year that begins in July, the South Asian country will have to make payments on its external debt of around $23 billion.

Pakistan’s government liquidity and external positions remain fragile. The budget projects Rs6.35 trillion ($21 billion) of loans from external sources, including $1.5 billion from Eurobond issuances, $4.6 billion from commercial banks, $2.4 billion from the IMF and another $2.7 billion from other multilateral partners, said Moody’s Investors Service in a report.

The government expects most of the remaining sums to come from other bilateral partners, including China, Saudi Arabia and the United Arab Emirates,” it added.

“Pakistan is unlikely to access market financing at affordable costs, either from Eurobonds or commercial banks, in the foreseeable future. The country’s external debt repayment will remain high for the next few years, with about $25 billion of repayments (principal and interest) due in fiscal 2024,” it noted.

It is relevant to mention that Pakistan required the rollover of SAFE deposits of $1 billion and the re-financing of $1.3 billion in commercial loans within the ongoing month. Pakistan had dispatched its official request to China for the granting of rollovers of $1 billion in deposits and the re-financing of $1 billion in commercial loans. So far, Islamabad had not paid back the remaining $300 million, and there was an understanding that the remaining amount would also be refinanced when it was paid back in the coming days.

Sources said that the re-financing of commercial banks would also help the government get a rupee component equivalent to $1.3 billion, which was quite crucial for keeping the cash balance in surplus. Although the finance ministry had raised hefty amounts through auctions of T-bills and PIBs, the scarcity of dollar inflows made it hard for the government to keep its domestic rupee balance in surplus at a time when there was a widening gap between total revenues and total expenditures in the outgoing fiscal year.

While briefing parliamentarians belonging to the NA Standing Committee on Finance, Dar said that politics was taking its toll on Pakistan and mentioned that an all-out effort had been made to accomplish the ninth review of the IMF programme.

“We cannot clap with one hand,” he commented, referring to the incomplete status of the ninth review of the Fund programme.

He expressed a strong belief that Allah had created this country and would safeguard it. He said that Pakistan possessed trillions of dollars in assets, so there was no need to worry. However, he acknowledged that the country was currently facing a dollar liquidity crunch.

He said that the budget strategy paper got delayed because of the IMF, and it was finalised just a couple of days ahead of the announcement of the budget. He said the government did not make the budget keeping in mind the upcoming elections, but it was made to cater to the needs of the country. He said that the government had fixed an FBR tax collection target of Rs9,200 billion for the next fiscal year 2023-24 against the revised estimates of Rs7200 billion for the outgoing fiscal year. The FBR’s collection target of Rs9,200 billion was envisaged on a scientific basis.

Earlier, the National Assembly Standing Committee on Finance voiced its concerns regarding the sustainability of the proposed budget. Amidst the current economic situation in Pakistan, the Committee questioned the feasibility of Finance Minister Ishaq Dar’s ambitious budget proposals.

The minister presented the statistical evidence backing the revenue targets for the upcoming financial year, projecting a growth rate of 3.5% with the aid of the proposed budget. He underlined Pakistan’s commitment to meeting all its sovereign liabilities in a timely manner to avoid any risk of default.

He urged them to refrain from spreading panic within the business community, which could negatively impact the market and destabilise the dollar’s exchange rate. He further assured the committee of a future increase in Pakistan’s foreign reserves, supported by policies designed to enhance remittances and boost exports. The minister’s reassurances underscore the government’s focus on maintaining economic stability while progressing towards a prosperous future.

In response to concerns over the imposition of a 0.6% tax, both the FBR chairman and the finance minister affirmed the tax as a move towards documenting and digitalising the economy. This two-pronged approach aims to enhance revenue, accurately track transactions, and impose penalties as needed. There are concerns, however, that the current tax rate could discourage the use of banking channels, leading to a preference for cash transactions and potentially incentivising smuggling.

As a response, the chairman of the standing committee has proposed a reduction in the tax rate from 0.6% to 0.2%. The Lahore Chamber of Commerce further suggested that the definition of ‘smugglers’ be revised. The FBR was criticised for increasing the withholding tax by 1% and for the delays in releasing refunds.

The committee has recommended an equitable tax regime for raw material traders, regardless of their company’s financial standing.

Recognising the benefits of government subsidies to the fertiliser industry, the committee highlighted that these have led to the production of internationally competitive fertilisers.

To reduce pressure on existing taxpayers, the committee urged the government to increase the tax net by incentivising new filers, a move that the FBR reported has already resulted in over 900,000 new filers in the previous financial year.

The committee raised serious concerns about the $3 billion released by the previous government at minimal interest rates, which has not been optimally utilised.