Islamabad, JULY27: As talks with Chinese officials on the rescheduling of loans for the energy sector continue, concerns inside Pakistan’s banking sector are growing.
According to a statement from the People’s Bank of China, Finance Minister Muhammad Aurangzeb met with Pan Gongsheng, the governor of China’s central bank, on Friday and discussed bilateral finance cooperation.
On Thursday, Mr. Aurangzeb traveled to Beijing to have discussions over the International Monetary Fund’s recommended structural reforms and debt relief for the power industry.Concerned about the outcome of the negotiations, stakeholders fear that if things don’t work out, there would be serious consequences for foreign investment and the stability of exchange rates.
A senior banker closely following the situation stated, “We believe China will not outright reject Pakistan’s request to reschedule energy sector loans, but the final outcome appears bleak.” He claimed that China’s initial reluctance to address the matter caused the visit to be postponed, signaling their differences with Pakistan on discussions for energy financing.
China has been Pakistan’s major foreign investor for years. Hong Kong investment, which is seen as Chinese-approved, is also quite important. Chinese investments are still the greatest in FY24, notwithstanding a drop. When Hong Kong and China’s investments are combined, foreign direct investment (FDI) makes up almost half of Pakistan’s total inflows, which grew by 17% in FY24.
Despite this increase, overall inflows were just $1.9 billion, of which $906 million came from Hong Kong ($338 million) and China ($568 million). Senior banker S.S. Iqbal stated, “We have become more dependent on China as we negotiate to reschedule $15 billion in energy sector loans, receive the highest FDI from China, and rely on them as our largest trade partner.” “To increase our reserves, China has also been lending money or delaying payments.”
In order to support Pakistan’s foreign exchange reserves, the People’s Bank of China and the State Bank of Pakistan struck an agreement on March 23, 2018, for the latter to grant a $2 billion loan through China’s State Administration of Foreign Exchange (SAFE). Since 2018, this debt has been rolled over annually; the most recent rollover took place on February 29, 2024. The loan was extended for a year and was due in March.
“The State Bank stopped a $1.8 billion profit outflow to Chinese investors in FY24, even though China has supported our reserves,” Mr. Iqbal remarked, raising the question, “How can the Chinese sit calm and cool with this kind of treatment?”
