China has agreed to rollover a $2 billion loan on existing terms after initially requesting a price increase, since Pakistan's approach of maintaining foreign exchange reserves through deposits by three nations is getting pricey due to an 118% increase in interest rates.
According to Ministry of Finance officials, an agreement has been struck with Beijing to prolong the payback period of the $2 billion loan, which is set to mature on March 23rd, Pakistan Day.
The Chinese embassy's reaction was still waiting.
According to sources, China first requested that interest rates on the $2 billion loan be raised even higher. Pakistan presently pays 7.1% interest based on the six-month Secured Overnight Finance Rate (SOFR) + 1.715%.
The officials stated that China had informally expressed its intention to prolong the payback time, and the finance ministry was awaiting a formal answer.
According to authorities, Interim Prime Minister Anwaarul Haq Kakar publicly requested last month that the Chinese government roll over the maturing debts.
In the previous fiscal year, Pakistan paid Rs26.6 billion in interest to China, Saudi Arabia, and the United Arab Emirates (UAE) on $9 billion in deposits made with the State Bank of Pakistan, according to the SBP balance sheet.
The country paid Rs12.2 billion the previous year, which increased by 118% in the following year.
According to the authorities, the previous fiscal year's currency depreciation was a key contributor to the 118% increase in interest costs.
The central bank's gross official foreign exchange reserves are $8 billion. Over the last decade, Pakistan has followed a policy of borrowing from regional nations amid difficult economic times.
It has not been able to enhance repayment capability; thus, these loans are being extended at maturity.
As of June last year, the regional governments had deposited $9 billion.
Following a staff-level agreement with the International Monetary Fund, Saudi Arabia and the UAE expanded their exposure to Pakistan, bringing the total to $12 billion for all three countries.
The cost of interest on these deposits is now expected to increase substantially for this fiscal year after the increase in the size of the deposits.