China has committed to refinancing $3.7 billion in commercial loans to Pakistan, denominated in Chinese currency instead of US dollars, marking a shift from previous arrangements. This refinancing includes a $2.4 billion loan maturing in June, part of a broader agreement to refinance loans maturing between March and June 2025, The Express Tribune reported.
The decision, part of China’s broader strategy to reduce reliance on the dollar, will assist Pakistan in maintaining foreign exchange reserves in double digits.
Earlier this year, Pakistan repaid $1.3 billion to the Industrial and Commercial Bank of China (ICBC) in three installments, and the ICBC is expected to reissue the amount in Chinese currency, pending some clarifications.
The refinancing from China is expected to push Pakistan’s foreign exchange reserves to around $12.7 billion before a potential dip in mid-June. The central bank’s reserves currently stand at approximately $11.4 billion after receiving a $1 billion injection from the IMF.
A $2.1 billion loan from three Chinese commercial banks, including the China Development Bank, Bank of China, and ICBC, is also maturing in June. Pakistan is expected to repay this loan before its maturity to ensure that its reserves remain stable at the end of the fiscal year.
The new loan will be provided in Chinese currency, and discussions are ongoing regarding the interest rate, with China offering two options: a fixed rate or a floating rate that will not be based on the Shanghai Interbank Offered Rate (Shibor).
The timely refinancing of these loans is crucial for Pakistan to meet its target of increasing foreign reserves to nearly $14 billion under the International Monetary Fund’s (IMF) program. In addition to these loans, Pakistan must refinance a $300 million loan from the Bank of China, also due next month, to maintain its reserve levels.
Pakistan’s continued dependence on Chinese financing is part of a broader trend in which China is moving away from dollar-denominated loans. According to the latest IMF report, as of December 2024, Pakistan’s total foreign commercial loans amounted to $6.2 billion, with $5.4 billion of that in Chinese commercial loans.
With the rupee-dollar parity remaining relatively stable, the government has focused on ensuring that its foreign reserves remain at critical levels, relying on China’s ongoing support, including cash deposits, commercial loans, and trade financing facilities.
The IMF report also highlighted that Pakistan has secured commitments for $1 billion in financing over the next year, but access to external commercial financing is expected to remain limited during this period. The report anticipates a return to the Eurobond and global Sukuk markets by fiscal year 2027, contingent on improved policy credibility.
