To stabilize its economy, Pakistan has secured an agreement with China, Saudi Arabia, and the UAE to roll over $12 billion in debt for one year.
This financial lifeline coincides with the anticipated approval of a $7 billion bailout package from the International Monetary Fund (IMF), slated for later this month.
The combined efforts aim to provide Pakistan with the necessary financial buffer to navigate its economic challenges.
The IMF Executive Board is scheduled to meet on August 28 to approve the $7 billion Extended Fund Facility for Pakistan. Finance Minister Muhammad Aurangzeb confirmed there is no delay in the meeting, ending speculation regarding the timing of this critical approval.
The IMF’s approval is contingent on Pakistan securing financing commitments from its three traditional creditors.
Strengthened foreign exchange reserves
Pakistan’s foreign exchange reserves have improved compared to a year ago. Despite this, the IMF identified a $3-5 billion financing gap over the three-year program period, deemed manageable by the finance minister.
Pakistan has received an offer from a foreign commercial bank, but the government is waiting for the IMF Board’s approval before asking the lender to reduce the offered interest rates.
Standard Chartered Bank has offered a loan of less than $400 million but at a double-digit interest rate that Pakistan cannot afford.
Pakistan’s credit rating
Fitch has improved Pakistan’s credit rating by one notch, raising it from CCC to CCC+, though it remains below investment grade.
This upgrade is seen as a positive step towards achieving macroeconomic stability. The central bank has also cut interest rates by 1%, another critical element for stability.
Finance Minister Aurangzeb expressed hope that Pakistan’s credit ratings would improve further by the end of the year.
A higher rating would allow Pakistan to access international capital markets and issue sovereign bonds at lower rates than current CCC+ ratings. Standard and Poor’s, however, has yet to improve Pakistan’s CCC+ rating.
Issuing Panda bonds
Pakistan is also planning to issue Panda bonds in the Chinese markets, with the help of a Chinese financial adviser.
The transaction is expected to be completed by the end of this year or early 2025.
The government is also considering hiring another Chinese financial adviser to secure an energy debt rollover. Pakistan has requested a five-year extension for the energy debt, but negotiations are ongoing.
The government has also initiated a privatization program and is undertaking an exercise to close or merge ministries. Aurangzeb emphasized the need to right-size the federal government as part of these cost-cutting measures.
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