Default watch: Chinese bank may refinance $500m as Dar interrogated in Senate 

ISLAMABAD: Finance minister Ishaq Dar was made to sweat in a senate session on Thursday over the continued delays in the resumption of Pakistan’s programme with the International Monetary Fund (IMF) on the same day that a Chinese bank provided assurance that it will provide another refinanced $500 million loan within the next few days. 

This brings the total of commercial loans up to $1.7 billion out of the total committed amount of $2 billion. Pakistan is currently undergoing a massive liquidity crisis due to a constantly delayed IMF programme. The refinancing news comes on the same day that finance minister Ishaq Dar admitted that the fund was asking for the materialisation of commitments made by ‘friendly countries’ with Islamabad, which remains the “only delay” in resumption of the stalled programme. 

Speaking during the Senate’s session today, Dar said: “At the time of previous reviews, certain friendly countries made commitments to bilaterally support Pakistan. But the IMF is now asking that they should actually complete and materialise those commitments. “That’s the only delay,” the finance minister told the Senate.

Dar was responding to queries raised by Pakistan Peoples Party (PPP) Senator Raza Rabbani pertaining to the delay in agreement with the IMF. “The moment the staff-level agreement (SLA) and Memorandum of Economic and Financial Policies (MEFP) [of IMF] will be finalised, it will be put on the website of the Ministry of Finance,” Dar said.

The State Bank of Pakistan (SBP) received $500 million last week from the Industrial and Commercial Bank of China (ICBC) just days after it had received $700 million from the China Development Bank. The upcoming refinanced loan of $500 million would bring the total of commercial loans to $1.7 billion out of the total committed amount of $2 billion.

Now, Pakistani authorities are anxiously waiting for confirmation from other ally countries like Saudi Arabia, UAE, and Qatar, as well as from the World Bank and the Asian Infrastructure Investment Bank, for fulfilling the external financing needs of $6 billion until the end of June 2023.

IMFBailout

Pakistan and the IMF have been negotiating the resumption of an installed $7bn IMF programme for months now but are yet to reach an agreement. The country had been able to secure the last tranche of $1.17 billion back in August 2022 under the leadership of former finance minister Miftah Ismail. The disbursement had been achieved by ending a massive fuel subsidy introduced by former prime minister Imran Khan and by agreeing to other terms of the IMF. The state bank at the time had more than $8 billion in foreign reserves. 

In September 2022, however, Ishaq Dar took charge of the finance ministry and further negotiations with the IMF took a different turn. Dar, who during a television interview said “he knew how to deal with the IMF” since he had been doing it for decades, decided to artificially keep the price of the rupee high. However, this strategy failed within a few months and by January 2023 Pakistan was staring down the possibility of default. The country began facing a shortage of forex reserves that has led to a curb of imports and skyrocketing inflation.

Since then Dar has been trying to keep his chin-up and convince the nation that we are out of the water, negotiations with the IMF have not been so simple. The IMF team left Pakistan on the 9th of February without signing a staff level agreement, since when the government has been scrambling to meet the fund’s demands and get the vital $1.1 billion released. On February 11th, the government bulldozed a mini-budget through the national assembly to placate the IMF and agreed to impose Rs 170 billion in additional taxes to meet the fund’s conditions.

In the meantime the government has been trying to receive loans from friendly countries to try and shore up forex reserves and avoid default. Pakistan has previously received a $700m loan from China to help in this regard. 

Pakistan had been able to secure the last tranche of $1.17 billion back in August 2022, after the IMF approved the seventh and eighth reviews of the package. The state bank at the time had more than $8 billion in foreign reserves but the agreements could not bring about macroeconomic stability. The ninth review is facing major roadblocks due to non fulfillment of conditions, specifically in the energy sector, untargeted subsidies, and pegging the foreign exchange at a lower rate than the market. 

The cash-strapped nation felt an added pressure due to devastating floods that caused a damage of $30 billion. During this time foreign exchange reserves have dropped from $8 billion to a dangerously low of less than $3 billion. However, subsidies such as the Kissan package have also been slashed and the government has been trying to make concessions to receive the long-overdue tranche.