Industrial and Commercial Bank of China (ICBC) has not directly given a $1.3 billion loan due to Pakistan’s highly risky credit rating and instead disbursed funds through its Karachi branch to help bail out Islamabad.
Because of the re-routing of funds, Pakistan has not recorded $1 billion as foreign debt, disbursed by ICBC in March, according to government sources.
Instead, the $1 billion loan has been treated as foreign currency-denominated domestic debt, an accounting entry that will understate external public debt and reflect lower-than-actual debt repayment. The remaining $300 million was disbursed this month.
The development underscores the challenges that Islamabad is facing in arranging foreign commercial loans as part of plans to raise over $6 billion to meet a core condition of the International Monetary Fund (IMF) for the revival of its loan programme.
The Ministry of Economic Affairs on Wednesday released the external loan details for July-March 2022-23, which showed that Pakistan received only $348 million in foreign loans during March, a figure underreported by $1 billion.
Finance Minister Ishaq Dar tweeted on March 3 that ICBC had approved $1.3 billion and the State Bank of Pakistan (SBP) received the first tranche of $500 million the same day.
In another tweet on March 17, Dar said that the central bank had received the second loan tranche of $500 million.
Sources said that the Chinese bank had to adopt a different route to disburse funds due to Pakistan’s poor credit rating.
Three major international credit rating agencies have assigned speculative ratings to Pakistan, indicating high risks of default. Lending to the country is now considered risky, which can negatively impact balance sheets of foreign creditors.
Finance ministry sources said that the different treatment “has now placed the $1 billion loan in the domestic debt category.”
Pakistan has also been trying to convince the IMF to consider a $1 billion to $1.5 billion foreign commercial loan part of the minimum $6 billion external financing requirement. The IMF has identified an external financing gap of over $6 billion, which has to be bridged before reaching a staff-level agreement.
However, the IMF is of the view that Pakistan may not be able to raise new foreign commercial loans due to its poor credit rating.
The Ministry of Economic Affairs’ report showed that Pakistan received only $7.6 billion in foreign loans during the first nine months of current fiscal year.
Disbursements were not enough to finance the maturing foreign debt, making a severe dent in the central bank’s foreign exchange reserves of $4.4 billion.
The key reason for low disbursements was the government’s failure to ensure timely completion of the ninth review of IMF’s programme. As a consequence, the foreign loans of $7.6 billion were equal to only one-third of the annual budget estimate of $22.8 billion.
Pakistan’s borrowing options have remained limited after the credit rating agencies downgraded its rating to junk status. This has increased borrowing costs in addition to virtually closing the doors to floating Eurobonds or acquiring new foreign commercial loans.
Against the annual estimate of $7.5 billion, Pakistan has only received $900 million in foreign commercial loans in the current fiscal year, according to the economic affairs ministry. This is exclusive of the $1 billion Chinese debt.
The government had budgeted $2 billion in sovereign bond-based borrowing but the plan did not materialise due to the poor credit rating and expected high interest cost.
The government also expected the receipt of $3 billion from the IMF but it has so far received only $1.1 billion. It seems that the country may not be able to fully utilise the $6.5 billion IMF package and a significant amount may lapse with the expiry of the programme in June.
The government also expected to receive $1.6 billion under the most expensive Naya Pakistan Certificates. So far, $538 million, or one-third of the annual estimate, has been received.
For the current fiscal year, the government estimated inflows of $7.7 billion in loans from multilateral agencies. In nine months, $4 billion, or 53%, has been disbursed.
The World Bank disbursed about $1.2 billion. The Asian Development Bank was the largest lender with disbursement of $1.94 billion, which was 60% of the annual estimate.
Besides, the Islamic Development Bank (IDB) gave $161 million against the annual estimate of over $1.2 billion. Saudi Arabia disbursed $782 million in an oil credit facility against annual estimate of $800 million.
Published in The Express Tribune, April 20th, 2023.
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