First non-Chinese loan in years, Pakistan obtains $300 million from UBL

ISLAMABAD: Pakistan has secured a $300 million commercial loan with interest rates ranging from 7.2% to 7.7%. This marks the country’s first new non-Chinese financing source in several years and will assist in meeting the external financing requirements under the International Monetary Fund (IMF) programme.

Government sources have revealed that the loan was obtained from United Bank Limited (UBL), which arranged the financing through Gulf countries, as reported by The Express Tribune. Of the total loan, $250 million has been secured at an interest rate of one-year Secured Overnight Financing Rate (SOFR) plus 3%, translating to an approximate rate of 7.2%. This portion of the loan is expected to be repaid in less than a year. Additionally, $50 million has been secured at one-year SOFR plus 3.5%, equating to 7.7% at current rates.

These interest rates are lower than those of a two-year Chinese commercial loan finalized in September. Senior government officials have confirmed the arrangement of the $300 million loan through UBL, with plans to increase the facility by an additional $100 million.

This loan represents the first non-Chinese financing option since the fiscal year 2022, as Gulf and European banks had withdrawn their services after maturity due to Pakistan’s declining credit rating and an impending default situation. The loan from UBL could provide the government with leverage to secure more foreign commercial financing, which had been challenging due to low credit ratings and high-interest rate demands from foreign banks.

Earlier in the year, Pakistan had initiated a $600 million loan with Standard Chartered Bank, which carried an interest rate of approximately 11%. However, the government later decided against signing that agreement.

The IMF has identified an external financing gap of $2.5 billion for this fiscal year, which the government is working to fill through various avenues, including a yet-to-be-secured $1.2 billion facility from Saudi Arabia for deferred oil payments. This loan is the second foreign commercial loan obtained in three months, following a $200 million loan from the Bank of China in September, which carried an interest rate of about 8.5%.

In the past several years, Pakistan has accumulated around $7.4 billion in foreign commercial loans at interest rates between 7% and 8%, depending on the economic climate. Approximately $3.8 billion of this debt is due for repayment in the current fiscal year, and the government aims to refinance this debt amid ongoing vulnerabilities in its external financial position.

Aurangzeb stated on Wednesday that Pakistan’s foreign exchange reserves currently cover around 2.6 months of imports and is expected to reach a three-month cover by June next year. To manage its limited foreign exchange reserves, currently at $12 billion, Pakistan has curtailed its imports. The government also plans to raise $1 billion through Eurobond offerings, though it has yet to enter global markets.