Pakistan seeks two-year rescheduling of $3.4 billion debt from China amidst IMF concerns

ISLAMABAD: Pakistan has formally requested China to reschedule $3.4 billion in debt for a two-year period to help bridge a foreign funding gap identified by the International Monetary Fund (IMF) as success in this endeavour could address external funding concerns ahead of the upcoming program review talks.

Deputy Prime Minister Ishaq Dar made this request during his recent visit to Beijing, with government sources indicating that Chinese authorities are optimistic about the proposal, which aims to alleviate Pakistan’s external financing challenges.

Pakistan has reached out to the Export-Import (Exim) Bank of China to reconsider loan repayments due from October 2024 to September 2027. The government is working to secure financing to cover a $5 billion external financing gap for the duration of the three-year IMF programme.

This marks the second time Pakistan has sought rescheduling of the $3.4 billion debt within five months, following an initial request made by the Finance Minister to the Exim Bank in September of the prior year. A joint statement from China and Pakistan, released after President Asif Ali Zardari’s official visit to Beijing, emphasised Pakistan’s appreciation for China’s support in maintaining fiscal and financial stability.

The $3.4 billion debt, which will mature between October 2024 and September 2027, aligns with the three-year IMF program period. The loans are categorised as either direct lending or guaranteed lending to State-Owned Enterprises (SOEs). Rescheduling is deemed critical for Pakistan as it forms part of the broader $5 billion external financing strategy that must be implemented according to the IMF requirements set forth during the signing of the bailout package in September.

The request includes a two-year extension for repaying direct and guaranteed debt from the Chinese Exim Bank, while ensuring that interest payments continue.

Specifically, $505 million in direct loans will mature from October 2024 to September 2025, covering the initial two reviews of the IMF programme. From October 2025 to September 2027, an additional $1.7 billion in direct loans will mature, totalling $2.2 billion that requires rescheduling. Additionally, $1.2 billion in loans to SOEs will also mature during this timeframe, with most payments due from October of this year.

Earlier, in July 2023, a previous finance minister announced that China had agreed to roll over $2.4 billion of loans due between July 2023 and June 2025. Currently, Pakistan is only required to pay interest on the rescheduled debt.

Should Pakistan fail to repay the $3.4 billion, its external financing gap would effectively decrease by that amount. Recently, the government secured a $1.2 billion Saudi oil facility and obtained a $300 million loan from United Bank Limited to help address the financing gap.

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Pakistani authorities have reportedly engaged in multiple meetings regarding the $3.4 billion debt restructuring, sharing necessary data with the Exim Bank. The first formal review of the $7 billion IMF programme is expected to commence in the first week of March, with favourable outcomes crucial for the release of over $1 billion in the next loan tranche.

Pakistan relies heavily on China for financial support, with ongoing rollovers of $4 billion in cash deposits, $6.5 billion in commercial loans, and $4.3 billion in trade financing.

Fitch Ratings, one of the leading global credit rating agencies, noted on Friday that securing adequate external financing remains challenging for Pakistan due to significant maturities and existing lender exposure.

Although Pakistan has planned for approximately $6 billion from multilaterals, including the IMF, around $4 billion is expected to refinance existing debt.

In addition to the $3.4 billion rescheduling request, Finance Minister Muhammad Aurangzeb has sought a $1.4 billion new loan during discussions with the Chinese Vice Finance Minister in Washington, asking for an increase in limits under the Currency Swap Agreement from CNY 30 billion to CNY 40 billion. It remains uncertain if China has responded favourably to this additional request.

Fitch stated that while Pakistan is making progress in restoring economic stability and rebuilding external reserves, advancing on challenging structural reforms will be essential for upcoming IMF programme reviews and continued support from other multilateral and bilateral lenders.

The agency anticipates that foreign reserves will exceed projections under the IMF programme, despite remaining low compared to financing needs. Pakistan faces over $22 billion in public external debt maturing this fiscal year, including nearly $13 billion in bilateral deposits.

Fitch believes that bilateral partners will roll over debts as promised to the IMF, as evidenced by Saudi Arabia’s $3 billion rollover in December and the UAE’s $2 billion in January.