The Pakistani government is considering borrowing an additional $750m in short-term loans from China, in order to pay back the Eurobond debt accumulated during the tenure of Gen (retd) Pervez Musharraf, media sources have reported. The Ministry of Finance is reported to have said that since foreign commercial banks have relatively lower interest rates, the government may acquire another commercial loan to pay back the $750m Eurobond debt.
In 2007, the Musharraf government had issued 10-year bonds at a 6.875pc interest rate, maturing on May 24 this year.
Earlier, the Finance Ministry had been considering issuing another sovereign bond amounting to $750m to retire the previous debt. If the government finalises the borrowing, this will be the third major borrowing from China in the past six months, sources are reported to have stated.
Earlier, Chinese banks have loaned out $1.3b to support the negative balance of payments situation and foreign currency reserves.
Sources are reported to have said that China was offering loans at an interest rate of 3.3 pc, which is better than the most competitive rates of 5.5pc that Pakistan got against $1 b Sukuk bond issued last year. Previous foreign commercial borrowings have been at an interest rate of around 4.7pc.
However, short-term loans are usually acquired for 1 to 1.5-year duration which increases risks associated with exchange rate fluctuation.
Fresh Borrowings to retire past borrowings may signal the inability of the government to pay back the loans by utilising indigenous resources. Independent economists consider this to be a debt trap, which has persistently been increasing the cost of debt servicing.
Pakistan’s borrowing from China is accelerating at a rate faster than its investment under the China-Pakistan Economic Corridor (CPEC). In all, Pakistan has acquired $2.1b in loans from China from September to February 2016-17. Out of the total, $1.3b have been borrowed on commercial terms while $1b have been for project financing.
