As India continues to pound Pakistan, Beijing offers Islamabad $3.7 bn lifeline

Pakistan is set to repay its loans at least three days before their maturity to ensure these funds are returned ahead of the fiscal year's close. This move is facilitated by financial support from China, provided in RMB currency, according to sources. The China Development Bank, Bank of China, and the Industrial and Commercial Bank of China (ICBC) are involved in this refinancing effort, lending 9 billion RMB, 3 billion RMB, and 3 billion RMB respectively. The loans are being extended for three years.

While the extension terms are confirmed, the interest rates are yet to be settled, as per a report in The Express Tribune. China has proposed two options: a fixed rate or a floating rate not based on the Shanghai Interbank Offered Rate (Shibor). This timely refinancing is vital for Pakistan to maintain its reserves in double digits by the end of June. Under the International Monetary Fund (IMF) programme, Pakistan has committed to increasing its reserves to nearly $14 billion within the fiscal year.

Previously, Pakistan returned a $1.3 billion loan from ICBC in three instalments earlier this year. Following some clarifications that ICBC has requested, the bank is expected to re-lend this amount in RMB shortly. The original ICBC loan had a floating interest rate of approximately 7.5%, and the next Chinese refinancing could elevate reserves to $12.7 billion before a likely dip in mid-June.

The Bank of China's $300 million loan, also due for maturity next month, will be refinanced in Chinese currency. This strategy aligns with China's broader policy to decouple from the US dollar, leaving Pakistan reliant on Chinese financial backing. China has assured Pakistan of refinancing $3.7 billion in commercial loans, denominated in Chinese currency, before June ends, a move that will stabilise foreign exchange reserves.

Pakistan remains heavily dependent on China's financial support, which includes the rollover of $4 billion in cash deposits, $5.4 billion worth of commercial loans, and a $4.3 billion trade financing facility. This dependency highlights the significance of China's commitment during recent meetings to refinance loans maturing between March and June 2025.

While the IMF report acknowledges firm commitments for $1 billion financing over the next year, it also notes that access to external commercial financing might remain limited. Nonetheless, Pakistan is expected to gradually return to the Eurobond and global Sukuk markets by fiscal 2027, reflecting a potential restoration of policy credibility.