PESHAWAR – Pakistan’s Prime Minister Imran Khan has asked China for a US$9 billion bailout package comprised of financial support and the rollover of existing debts to prevent a possible default on external payments worth $8.6 billion that come due at the end of June.
Khalid Mansoor, Pakistan’s Special Assistant to the Prime Minister (SAPM) on the China-Pakistan Economic Corridor (CPEC), a spoke of China’s Belt and Road Initiative, told media on Monday that’s Chinese leadership “took note” of the request while Khan was in Beijing but had not yet replied.
He said China agreed to consider Pakistan’s request for a $4 billion debt rollover and additional financial support worth $5.5 billion by expanding an existing currency swap arrangement from $4.5 billion to $10 billion.
Mansoor was part of Prime Minister Imran Khan’s delegation which traveled to Beijing last week for high-level talks with the Chinese leadership on the eve of the Winter Olympics.
“It is an unusual situation, but Pakistan is used to it. We have been trapped in a vicious debt circle and need a constant dollar inflow to retire a perpetually inflating debt burden,” Farrukh Saleen, an Islamabad-based economist and financial analyst, told Asia Times.
He said China had already loaned $4 billion to the State Administration of Foreign Exchange (SAFE) deposit to shore up the country’s fast-depleting foreign exchange reserves.
“The government perhaps wants a further $3 billion in SAFE deposits as the reserves show a downtrend despite inflow from China and other contributing countries,” Saleem added.
In a recent country report, the International Monetary Fund (IMF) said Pakistan owed China $18.4 billion, equal to 20% of the country’s total external debt liabilities of $92.3 billion. That amount represents one of the highest contributions by any single country or institution ever to Pakistan, the report adds.
Projecting Pakistan’s GDP would grow at 4% during the current fiscal year, the IMF predicted total foreign debt would jump to $103 billion by the end of the next fiscal year.
The IMF projected Pakistan’s external debt would be $92.3 billion just 10 months ago, which was adjusted upwards due to a larger than expected current account deficit and related external financing needs.
Khan’s government has borrowed more than $30 billion in foreign loans during its three plus years in power. In 2017-18, before Khan took over, Pakistan’s external debt was $72.5 billion.
Total owed foreign loans, which stood at $2.4 billion in 2017-18, has ballooned to $12.4 billion under Khan’s watch. Economist Farrukh says Pakistan needs a continuous current account surplus of $15 billion on average to avoid taking out new loans or major currency depreciation.
Last month, Pakistan’s foreign currency reserves dropped to $15.7 billion, with net liquid reserves contracting by more than $1.8 billion in a month. Pakistan’s existing foreign currency reserves are largely built through borrowings.
Pakistan has recently received $3 billion from Saudi Arabia, $2 billion from the United Arab Emirates and $4 billion from China to shore up its declining foreign reserves. In addition to that, the IMF has given more than $2 billion, while another $1 billion has come from Sukuk bonds.
Pakistan needs to pay $8.6 billion this year and $16.9 billion in the next financial year to pay off external debts.
Analysts say China has growing security and budgetary concerns that have diverted its focus away from the CPEC’s original pace. They believe China is acutely aware of Pakistan’s economic woes and is not keen to take the risk of pumping more money into the debt-ridden nation.
Pakistan is now seeking to allay Beijing’s security concerns, which center on militant groups that have targeted CPEC projects and Chinese nationals, and assure the Chinese leadership that it can and will fulfill its financial commitments.
Beijing reportedly has serious concerns about unpaid dues owed to Chinese independent power producers (IPPs) that have built modern new power plants on the condition Pakistan pay for the power produced even if it isn’t used or delivered.
Pakistan owers $1.3 billion to Chinese IPPS but reportedly had only paid $286 million in the days before Khan’s Beijing visit.
“We made 50 billion rupees ($286 million) to nine Chinese IPPs, including coal-based projects of Engro and Port Qasim. We assured the Chinese leaders that another $286 million would be cleared before the end of the current month,” Mansoor told journalists at a press conference on Monday.
Chinese investors are also reportedly pressing for the creation of a revolving fund to cover 22% of their debt servicing payments to financial institutions. The Chinese side was assured this revolving account had been approved by Khan’s government, Mansoor said.
However, there has been little progress made on the $6.8 billion CPEC centerpiece project involving the revamp and upgrading of the railway network connecting Peshawar to Karachi. The Exim Bank of China has reportedly said it will not finance the Main line-1 (ML-1) project on the terms requested by Pakistan.
Pakistan seeks finances at a 1% interest rate, which the Chinese bank does not deem feasible. The two sides also disagree on the project’s financial cost.
China has also balked at insurance coverage proposals for starting key hydropower projects. Chinese insurance firm Sinosure, which underwrites political and commercial risk to cover the finances of hydropower projects, has held back on providing insurance cover to Pakistan’s hydro projects for several years.
All in all, China has released only about $25 billion out of an envisaged first phase of $53 billion under the CPEC’s framework agreement. Most of those outlays have gone to power sector developments.
Energy projects producing 5,300 megawatts of electricity have already been established, while the remaining power units proposed to generate an additional 3,500 megawatts are yet to be completed.
Other CPEC-related infrastructure projects valued at $28 billion are in various stages of implementation.
Follow F M Shakil on Twitter at @faq1955