China consents to renew a $2 billion debt on the current conditions.

China and Pakistan have reached an agreement to extend the repayment period of a $2 billion debt, maintaining the existing terms, following initial discussions where China sought a higher interest rate. The extension comes amidst Pakistan's strategy to bolster foreign exchange reserves through deposits from multiple countries, a tactic proving expensive due to a significant surge in interest costs, up by 118%.

Ministry of Finance officials disclosed that negotiations with Beijing led to a consensus on extending the maturity of the $2 billion loan, set to mature on March 23rd, coinciding with Pakistan Day. However, the formal response from the Chinese embassy is still awaited.

Initially, China proposed a hike in interest rates on the $2 billion debt, which currently stands at 7.1%. However, informal communications from China suggest an extension of the repayment period, awaiting formal confirmation, according to finance ministry sources.

Interim Prime Minister Anwaarul Haq Kakar formally urged the Chinese government to roll over the maturing loans last month.

In the past fiscal year, Pakistan paid Rs26.6 billion in interest to China, Saudi Arabia, and the UAE on the $9 billion deposits they placed with the State Bank of Pakistan, marking a significant increase from the previous year.

The surge in interest costs was largely attributed to currency devaluation in the preceding fiscal year, as reported by authorities. Pakistan's gross official foreign exchange reserves currently stand at $8 billion, with a decade-long policy of borrowing from regional countries during economic hardships.

Despite this, Pakistan has struggled to strengthen its repayment capacity, resulting in loan extensions upon maturity. As of June last year, regional countries had deposited $9 billion with Pakistan.

Following a staff-level agreement with the IMF, Saudi Arabia and the UAE increased their exposure to Pakistan, bringing the total tally to $12 billion for the three nations. However, with the increase in deposit size, the cost of interest is expected to rise substantially for the current fiscal year.

The SBP’s balance sheet revealed that Pakistan paid Rs42.1 billion to China last fiscal year for using a $4.5 billion Chinese trade finance facility. This facility, utilized predominantly to repay foreign debt, has contributed to maintaining gross foreign currency reserves.

Pakistan's inability to tap into non-debt-creating inflows has exposed the country to various risks, with exports failing to finance imports adequately and foreign direct investment remaining stagnant. Political instability and ad-hoc measures further deter foreign investors.

Despite foreign lending and IMF support, Pakistan's official foreign currency reserves of $8 billion are deemed insufficient to service existing Chinese facilities. Pakistan obtained IMF loans at interest rates ranging from 1.89% to 4.98%, paying Rs29.5 billion in interest during the last fiscal year.

With Pakistan's existing IMF program expiring soon, securing the last tranche of $1.2 billion remains a priority for the incoming finance minister. However, amidst uncertainty over the appointment, clarity is sought by international financial institutions and local markets alike.