Pakistan borrows $1 Billion from its all-weather ally China to repay $1 Billion Saudi Arabia loan to avoid default on international debt obligations

Imran Khan and Xi Jinping, Courtesy:

Pakistan has once again turned to its all-weather friend China for help to avoid defaulting on international debt obligations. According to the Pakistani Ministry of Finance and the State Bank of Pakistan (SBP), Pakistan has taken a loan of $1 billion from China to repay a $1 billion loan taken from Saudi Arabia. Desperate Pakistan did so because had it defaulted the payment, Saudi Arabia would have reduced its financial support, highly placed sources confirmed.

In October 2018, Saudi Arabia had agreed to provide $6.2 billion worth of financial package to Pakistan for three years. This included $3 billion in cash assistance and $3.2 billion worth of annual oil and gas supply on deferred payments.

According to the agreement between the two nations, the assistance provided by Saudi Arabia was for one year. It had an option to roll over the amount at the end of the year for a period of three years. Pakistan was paying 3.2 percent interest on the $3 billion loan. Pakistan had received the first tranche of $1 billion in November 2018, second $1 billion in December 2018 and third tranche of $1 billion in January 2019.

The International Monetary Fund (IMF), in its report in April this year stated: “Saudi Arabia also refinanced $3-billion BOP (balance of payments) support loans that matured in November (2019)-January (2020).” However, the repayment of $1-billion loan within six months of its renewal has come as a surprise.

It is believed that the Chinese government has provided $1 billion in loans to Pakistan to retain the official gross foreign currency reserves at their current levels. Unlike Saudi loan that had been taken on the books of the central bank, the Chinese loan has been taken on the books of the federal government due to another condition of the IMF.

China tightens its grip over Pakistan

This development came just a day after China had further tightened its grip over Pakistan by financing the most expensive Railway project in the country. On 5th August the Executive Committee of the National Economic Council (Ecnec) approved the Mainline-1 railway project of the China Pakistan Economic Corridor (CPEC) worth $6.8 billion, 90% of which will be financed by China. Under the project, Pakistan’s existing 2,655 km railway tracks will be upgraded to allow trains to move up to 165km per hour, which will be double the speed of the capacity of the current network. Moreover, the line capacity will increase from 34 to over 150 trains each way per day.

China has pledged over $60 billion in various infrastructure projects in Pakistan, as part of the multi-billion-dollar China-Pakistan Economic Corridor (CPEC) agreement. This project is part of Beijing’s ambitious Belt and Road Initiative (BRI) to develop land and sea trade routes in Asia and beyond.

Pakistan owes China double the amount it owes to IMF

It’s surprising how the cash strapped nation is getting submerged deeper and deeper into China’s debt trap. According to an October 2019 report, Pakistan needs to repay China more than double the amount it owes the International Monetary Fund (IMF) in the next three years.

The PTI government took over $13 billion in foreign loans in the previous fiscal year. This is the second-highest amount in history. The loan was taken to repay maturing external debt and cushion the shrinking foreign exchange reserves. Since coming into power, the Imran Khan government received $26.2 billion in loans and out of that $19.2 billion was used to repay the maturing external debt and the remaining balance was added to the external public and publicly guaranteed debt.

OpIndia Staff: Staff reporter at OpIndia