China returns $1 billion loan: SBP

Islamabad: Pakistan's central bank announced on Friday that it has received a $1 billion loan from China, which has raised the country's foreign exchange reserves to more than $4 billion.  The government also expects to refinance another $300 million commercial loan from China in the near future.

Finance Minister Ishaq Dar announced earlier on Friday that Pakistan will receive a Chinese trade loan of $1 billion within 72 hours.  Islamabad pre-paid the debt after reaching a new agreement with Beijing.

Pakistan made the payment after China agreed to waive the prepayment penalty normally charged when a borrower decides to pay ahead of schedule.  Pakistan paid $1 billion 18 days before the due date.

Speaking before the Standing Committee on Finance of the National Assembly, Dar said Pakistan and China had reached an agreement on the repayment and refinancing of $1.3 billion in commercial loans and $1 billion in deposits of the State Administration of Foreign Exchange (SAFE).

Citing a story in The Express Tribune, Dar confirmed that Pakistan repaid a $1 billion loan from the China Development Bank (CDB) earlier in the week.  He said that if this news had not been published in the newspaper, the government would have kept the issue of prepayment under wraps.

According to the finance minister, the State Bank of Pakistan (SBP) will receive $1 billion next Friday or Monday.

Shortly after Dar's statement, a diplomatic source revealed that China had released $1 billion on Friday.  Sources also said the $300 million loan would be handled in the same way.  These are old loans that China is refinancing due to Pakistan defaulting on its debt.

Dar explained that the loan was repaid before the June 29 deadline as part of the debt management strategy to secure refinancing before the end of the financial year.  He also noted that while there is usually a penalty for early repayment, China has waived this fee.  Dar asserted that if the $1 billion had been paid on June 29, the refund would not have been possible in one day.

The FutureInfo earlier reported that Pakistan paid $1 billion to the China Development Bank (CDB) on Monday.

Pakistan is also scheduled to repay a $300 million loan to the Bank of China on June 26.  Dar said the same treatment will be applied to the Bank of China loan, with early repayment and China returning the money before June 30.

The finance minister added that two loans from Safe China, totaling $1 billion, will also be repaid before the end of June.

Pakistan's total official foreign exchange reserves fell to less than $3 billion after the Chinese debt was repaid.  Reserves are expected to increase further, but there will still be some shortfall due to debt repayments of $900 million to multilateral lenders.  A day earlier, Dar said that China understands the complex economic situation of Pakistan and is ready to provide financial assistance.

During the current fiscal year, Pakistan failed to obtain any new external trade credit.  Non-Chinese banks did not extend their loans or refinance due to the deteriorating economic conditions.

The Finance Minister reaffirmed that Pakistan will not neglect its sovereign obligations and will continue to make payments to all international creditors.

The finance minister said, "Pakistan's assets are soft and worth more than $6 trillion, so people should not worry about paying off the foreign government's $100 billion debt."

Dar hopes that the exchange rate between the rupee and the dollar will improve to around 244 rupees, and he urged people to stop talking about default.

He admitted that smuggling of foreign currency is still happening in Afghanistan and it cannot be eradicated.  The Finance Minister stated that after the change of government in Kabul in 2021, Afghanistan is meeting its foreign exchange needs from Pakistan through informal channels.

Regarding wheat smuggling, Dar said it has decreased since the government raised the subsidy price to around 4,000 rupees per 40kg.  He also noted that because gas subsidized fertilizer plants, urea became cheaper in Pakistan, creating a huge incentive for smuggling.

When asked about the tax collection target of 9.2 trillion rupees for the next financial year, the finance minister called it realistic.  He expected the Federal Board of Revenue (FBR) to generate an increase in revenue equal to nominal GDP (inflation plus GDP) growth of at least 25%.  He said the tax target for the next financial year is 28 per cent higher than this year's revised estimate of 7.2 trillion rupees, which should not be a problem for the FBR.

However, during the outgoing fiscal year, FBR only grew by 16 percent in collections despite a modest 38 percent growth rate.  This highlights the inefficiency of tax machines.  As a result, FBR cannot collect even Rs 7.1 crore even though the mini budget was implemented in February this year.