China Agrees to Refinance over $2b Debt

 
 
 
China agrees to refinance over 2 billion debt

Debt is a key component of long-term financing for sustainable development and structural transformation. A developing country must rely on borrowings to achieve its overarching goals of economic stability and national development. Proper debt management is the prerequisite for the sustainable economic growth of a country. There must be an equilibrium in exports and imports to minimise the need for borrowing and overcome the fiscal deficit. 

Over the past 15 years, Pakistan’s external debt and liabilities have grown at a varying pace, increasing 150 percent in foreign debt and liabilities to $116.3bn in 2021 from $45.4bn at the end of FY2008 (Express Tribune,2022). However, Pakistan needs to borrow more and more every year to repay its outstanding external loans, finance its current account and build its foreign exchange reserves

Recently, China agreed to refinance a $2.3 billion commercial loan to Pakistan. The country is currently in dire need of foreign loans due to decreasing foreign exchange reserves coupled with growing repayments and import financing requirements.

 Along with the refinancing, China has also withdrawn its condition that Pakistan cannot use the proceeds of the $2.3 billion commercial loan. In March, Pakistan had repaid the $2.3 billion commercial loan in the hope of getting it back in April. However, China had placed a condition that Pakistan could not use the money due to its weak external sector position. 

Furthermore, the loan will be provided at the lowest interest rate of 1%, which will help shore up foreign exchange reserves to double digits. The reserves slipped to $9.7 billion last week. Overall, Pakistan received $15.5 billion in loans from foreign creditors during the July-April period of the current fiscal year. Around 85% of the new gross foreign loans were aimed at bridging the budget deficit and supporting the foreign exchange reserves.

 

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IMARAT Institute of Policy Studies

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