Pakistan has decided to seek rollover of a $3 billion Chinese trade finance facility that it has actually used to repay maturing debt and is not in a financial position to return the money when the facility expires after six months.
The State Bank of Pakistan (SBP) has fully tapped the $3 billion or 20 billion Chinese yuan in the additional trade finance facility available under the China-Pakistan currency swap arrangement, showed financial accounts of the SBP for fiscal year 2019-20.
Sources said Pakistan largely utilised the Chinese trade finance facility to repay foreign debt and keep its gross foreign currency reserves at comfortable levels.
The bilateral currency swap agreement (CSA) was reached by the SBP and the Peoples Bank of China (PBOC) in December 2011 “in order to promote bilateral trade, finance direct investment and provide short-term liquidity support”, according to the central bank.
The original agreement had been renewed in December 2014 for a period of three years with overall limit of 10 billion yuan or $1.5 billion. It was further extended in May 2018 for a period of three years, with the amount being increased to 20 billion yuan or $3 billion. The agreement is now going to expire in May next year.
“The (State) Bank purchased and utilised CNY 20,000 million (Rs475 billion) during the year with the maturity buckets of three months to one year,” said the SBP’s financial statement.
“We plan to roll over the CSA (currency swap agreement) for another three years in 2021,” said a spokesman for the central bank.
The trade facility, originally meant to promote bilateral trade in respective local currencies, has been instead used for paying foreign debt.
The $3 billion money is part of the current $12.1 billion in foreign currency reserves held by the central bank.
“Proceeds of the CSA of RMB 20 billion are part of the SBP reserves,” the central bank spokesman confirmed to The Express Tribune.
Pakistan paid Rs20.5 billion in interest to China on using the $3 billion trade finance facility in the last fiscal year, showed the central bank’s financial statement. China has become Pakistan’s largest creditor for the past few years.
The Pakistan Tehreek-e-Insaf (PTI) government, like its predecessor, has failed to tap non-debt creating inflows, which has exposed the country to various risks.
The existing $12.1 billion worth of official foreign currency reserves have largely been built through borrowing, including from private commercial banks.
The currency swap arrangement was originally directed at facilitating traders of the two countries, but Pakistan is using this window to inflate its foreign currency reserves.
If China does not extend the facility on its expiry, the central bank will have to arrange 20 billion yuan or $3 billion to return the Chinese loan. It will then use the dollars it holds to buy Chinese yuan from the market, which will have a direct impact on the reserves.
As of September this year, the central bank borrowed $5.8 billion from commercial banks under the forward and currency swap arrangements, according to the SBP data.
Just six months ago, in February 2020 when Pakistan was implementing the International Monetary Fund (IMF) loan programme, the SBP’s borrowing under the swap and future contracts was $2.9 billion, including $1.6 billion in long-term contracts.
Before the start of IMF programme in July last year, the SBP’s short-term borrowing had jumped to $7.8 billion, which the central bank started curtailing under an IMF condition.
The SBP’s decision to tap the Chinese trade facility for debt payment has provided temporary relief and the government will have to find sustainable long-term avenues to meet external financial needs.
Another $4 billion in short-term loan is maturing in the next few months that Pakistan borrowed from Saudi Arabia and the United Arab Emirates, said the sources.
Although the government expects that the Gulf countries will extend these loans for another year, it will have to make concerted efforts to make sure it actually happens.
The government has also not been able to get the suspended $6 billion IMF programme restored. The IMF is not bending on two conditions of introducing a mini-budget and increasing electricity tariffs, which has complicated matters for Prime Minister Imran Khan whose government is already facing criticism for a constantly high inflation.
Sources said the delay in restoring the IMF programme could undermine programme loans from the other two multilateral creditors, which were critical to return $10.6 billion in maturing loans in the current fiscal year.