Forex reserves drop as Pakistan returns $1 billion Chinese loan

Pakistan returned $1 billion to a Chinese bank as repayment for a commercial loan that was taken with the expectation of being refinanced soon.

The outflow reduced the State Bank of Pakistan's foreign exchange reserves to a six-month low of $10.6 billion.

The Industrial and Commercial Bank of China (ICBC) had provided the loan two years ago in multiple tranches, carrying a high interest rate of 7.5%.

The first tranche of $500 million was repaid in the first week of March. The gap in foreign exchange reserves was covered through dollar purchases from the interbank market, along with inflows from overseas sources.

Read: Pakistan’s foreign reserves plunge by $540mln to six-month low

The second tranche of $500 million was repaid in the third week of March, leading to a further drop in the central bank's foreign exchange reserves to $10.6 billion, the lowest level in six months.

According to sources, another $300 million loan installment from ICBC is set to mature by mid-April. They also mentioned that the government plans to repay this amount next month.

Pakistan remains heavily dependent on Beijing, which has been consistently rolling over $4 billion in cash deposits, $6.5 billion in commercial loans, and a $4.3 billion trade financing facility. 

Read: China extends $2bln loan repayment for Pakistan

Pakistan faces a significant financial challenge, with $2.7 billion in loans from Chinese banks set to mature between April and June this year. Among these, a substantial $2.1 billion loan from a three Chinese banks is due in June, along with an additional $300 million loan from the Bank of China that also requires refinancing that month.

To maintain its critical financial reserves, Pakistan must secure refinancing for these loans. The country increasingly relies on acquiring new foreign loans and rolling over existing debts to avert a reserves crisis.