China comes to the aid of cash-strapped Pakistan, approves USD 700 million loan

Pakistan’s all-weather ally China has approved a loan of USD 700 million and the funds will be transferred to the central bank this week, Finance Minister Ishaq Dar announced on Wednesday as the cash-strapped country tried to avert a financial crisis.

The announcement by Dar on the loan by the Board of China Development Bank (CDB) came a day after Pakistan’s National Assembly unanimously passed a money bill aimed at raising tax revenues to fulfil the demands set by the International Monetary Fund (IMF) for seeking a USD 1.1 billion loan facility to avoid an economic meltdown.

Dar said all formalities have been completed with CDB and the funds would be transferred to the State Bank of Pakistan.

Formalities completed

“Formalities have been completed and the Board of China Development Bank has approved the facility of USD 700 million for Pakistan. This amount is expected to be received this week by the State Bank of Pakistan, which will shore up its forex reserves!” Dar tweeted.

Also read: Pakistan needs to take steps to avoid an economic crash: IMF

Pakistan has a chronic balance of payments problem which was exacerbated in the last year, with the country’s forex reserves declining to critical levels.

As of February 10, the central bank had only USD 3.2 billion in reserves, enough to cover barely three weeks of imports.

To stem dollar outflows, the government has imposed restrictions, allowing imports of only essential food items and medicines until a bailout is agreed upon with the IMF, which is seen as essential for the country to stave off default.

IMF demands

Pakistan has already fulfilled demands of the IMF, including raising an additional Rs 170 billion in revenues by June before releasing crucial USD 1.1 billion out of an already agreed USD 7 billion loan programme.

The country needed about USD 10 to USD 12 billion by June to pay back loans and meet the current account deficit.

The government headed by Prime Minister Shehbaz Sharif has decided to implement measures to cut down on its expenditures by increasing taxes on the public and bringing down government expenses.

Cutting expenses

The government has also ordered the foreign ministry to slash the number of missions abroad and reduce their offices and staff and initiate other measures to cut down expenditures of the debt-ridden nation by 15 per cent.

Also read: Pakistan’s weekly inflation surges to 38.4%, exacerbating cash shortage

In November, finance minister Dar said that Pakistan has secured a USD 13 billion bailout from China and Saudi Arabia with USD 5.7 billion in fresh loans. Dar was confident that the cash would come before the IMF programme revival.

However, it became clear with time that Islamabad’s old allies refused to dole out more cash without the country first agreeing to the IMFs conditions. That was when Pakistan had to invite the IMF mission to negotiate the deal, The Express Tribune newspaper reported.

(With agency inputs)