China lends Pakistan further $700 million to shore up FX reserves

By Asif Shahzad

ISLAMABAD (Reuters) – Pakistan will this week receive a new $700 million loan from China to help shore up its foreign exchange reserves, the country’s finance minister said on Wednesday, in another step to help the South Asian nation recover from an economic crisis.

The credit facility, made through the state-owned China Development Bank will boost Pakistan’s forex reserves by about 20% and comes as the country is thrashing out a deal with the International Monetary Fund (IMF) to unlock funds from a $6.5 billion bailout.

“This amount is expected to be received this week by State Bank of Pakistan which will shore up its forex reserves,” Finance Minister Ishaq Dar said on Twitter.

A finance ministry official said the loan was in addition to other facilities that China has already extended to Pakistan. The money could come as early as Thursday, he added.

China Development Bank did not respond to a faxed request for comment.

Prime Minister Shehbaz Sharif said he was hopeful of reaching a deal with the IMF as soon as the country completes a series of steps demanded by the lender.

Addressing his cabinet, he said the government was focusing on austerity as a top priority. “Our government will utilise all resources to overcome the crisis,” he said.

The receipt of external financing is one of the measures needed before the IMF signs a staff level agreement that will unlock more than $1 billion in funding, that has been suspended since late last year.

“The fact that new money is being committed to Pakistan and old loans are being rolled over despite this, is a sign that the global community is committed to helping Pakistan meet its external challenges,” former Pakistani central bank deputy governor Murtaza Syed told Reuters.

Single largest creditor

Pakistan is struggling with its worst economic crisis in decades and its foreign exchange reserves, at their lowest in 10 years, are only enough to pay for less than three weeks’ worth of imports. Meanwhile, fiscal adjustments demanded by the IMF are fuelling decades-high inflation.

The country’s international bonds extended their decline on Wednesday with the 2027 dollar-denominated bonds dropping more than 1.2 cents in the dollar to trade just over 40 cents, Tradeweb data showed.

China is already Pakistan’s single largest creditor with its commercial banks holding about 30% of its external debt. The United States, historically a close ally, said this week it was concerned about this debt, and was talking to Islamabad about the “perils” of a closer relationship with Beijing.

(Reporting by Asif Shahzad; Additional Reporting by Ariba Shahid in Karachi; Writing by Shilpa Jamkhandikar; Editing by Miral Fahmy, Alexander Smith and Emelia Sithole-Matarise)