Pakistan’s Finance Minister, Ishaq Dar, announced on March 23, 2023, that China had agreed to roll over a $2 billion loan that matured last week, providing much-needed relief for the country’s acute balance of payment crisis. The rollover was critical for Pakistan, where reserves had dipped to just four weeks’ worth of imports, and talks with the International Monetary Fund (IMF) for a $1.1 billion bailout tranche had hit a stalemate.
Dar’s announcement was the first official confirmation of the rollover after the loan matured, and he did not disclose the new maturity date or other terms of the arrangement. Neither the Chinese government nor the central bank had commented on the rollover at the time of the announcement. However, a top finance ministry official had previously informed Reuters that a formal confirmation of the refinancing would be made after the process was completed.
The Chinese rollover was a significant relief for Pakistan, which has been struggling with a shortage of external liquidity. Pakistan had been negotiating with the IMF since early February for the release of $1.1 billion from a $6.5 billion bailout package agreed in 2019. One of the IMF’s conditions for the release of the tranche was assurance of external financing to fund Pakistan’s balance of payments.
Longtime ally China had provided the only help to Islamabad so far, with a refinancing of $1.8 billion credited to Pakistan’s central bank last month. To unlock the funding from the IMF, the Pakistani government had cut back on subsidies, removed an artificial cap on the exchange rate, added taxes, and raised fuel prices. The government was also implementing demand management policies to limit the current account deficit, which would not transfer further pressure on dwindling reserves.
Pakistan’s Finance Division of the government noted in its monthly Economic Update and Outlook that the country was currently facing a shortage in external liquidity. The report cited market frictions caused by relative demand and supply gaps of essential items, exchange rate depreciation, and the recent upward adjustment in fuel prices as reasons behind higher inflation expectations. Inflation, which was already running above 30%, a near 50-year high, was expected to stay elevated.
In summary, Pakistan’s announcement of the Chinese loan rollover was a critical development that provided much-needed relief to the country’s acute balance of payment crisis. While the new maturity date and terms of the agreement were not disclosed, the Chinese rollover was a significant boost to Pakistan’s efforts to secure external financing to fund its balance of payments and unlock the next tranche of the IMF bailout package.
