China Agrees to Reschedule Pakistan's Debt, Providing Relief Amid Rebuilding Efforts

Key Takeaways:

1. China agrees to reschedule over $2 billion of Pakistan’s publicly guaranteed debt for a period of two years.
2. The Economic Coordination Committee of the Cabinet approves the revised terms of the agreement between Pakistan and China.
3. The debt rescheduling provides relief to Pakistan amid efforts to rebuild foreign exchange reserves through fresh loans and debt rollovers.
4. Pakistan’s gross official foreign exchange reserves have bounced back to $8.7 billion after signing a new IMF program.
5. The Economic Coordination Committee also approves a supplementary grant for the Special Investment Facilitation Council (SIFC) and considers other proposals related to electricity rates and tobacco cess rates.

Introduction:

In a significant development, China has agreed to reschedule over $2 billion of Pakistan’s publicly guaranteed debt, providing much-needed relief to the government. The Economic Coordination Committee (ECC) of the Cabinet approved the revised terms of the agreement between Islamabad and Beijing. This move comes as Pakistan is in the process of rebuilding its foreign exchange reserves through fresh loans and rolling over maturing debt. The debt rescheduling comes at a crucial time for Pakistan, as it seeks to stabilize its economy and overcome economic challenges.

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Background:

Pakistan had built two nuclear power plants in Karachi with a combined generation capacity of 2,117 megawatts, and the total cost of the project was $9.5 billion, with $6.5 billion of financing coming from China’s Export-Import Bank (Exim Bank). The publicly guaranteed debt of $2 billion was scheduled to mature in the current fiscal year, but China has now agreed to pause the repayments for a period of two years.

China’s Support in Meeting Debt Obligations:

China has been a significant partner in helping Pakistan meet its debt obligations. On previous occasions, China has provided new loans and rolled over existing debt to assist Pakistan in managing its financial challenges. For instance, China prematurely refinanced $1.3 billion of Pakistan’s commercial loans in June, which helped the country avoid defaulting on its international debt obligations during a period when the International Monetary Fund (IMF) program was stalled.

Impact on Pakistan’s Foreign Exchange Reserves:

Following the signing of a new IMF program, Pakistan’s gross official foreign exchange reserves rebounded to $8.7 billion, a considerable improvement from the critically low level of $4.5 billion before the agreement. The debt rescheduling by China further strengthens Pakistan’s foreign exchange position and provides a breather for the government as it continues to work on its economic recovery and stabilization efforts.

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ECC’s Approval and Other Decisions:

The ECC, chaired by Finance Minister Ishaq Dar, approved the revised agreement with China. Additionally, the committee approved a Rs. 200 million technical supplementary grant in favor of the Special Investment Facilitation Council (SIFC), which aims to attract investment from Gulf Cooperation Council (GCC) countries and other nations in various sectors, including defense, agriculture, mineral, IT, and energy.

The ECC also considered and approved proposals related to electricity rates for cinema houses to revive the film industry and the export of vegetable ghee/cooking oil from export processing zones to Afghanistan through the land route. Moreover, the committee revised the cess rates of tobacco for the year 2023-24 to address budgetary requirements.

Conclusion:

China’s decision to reschedule Pakistan’s debt comes as a significant relief for the country, providing a breather in its efforts to rebuild foreign exchange reserves and manage its economic challenges. Pakistan’s relationship with China continues to play a crucial role in addressing its financial needs and fostering economic cooperation. As Pakistan progresses with its economic recovery, the prudent management of debt obligations and continued collaboration with international partners will remain critical for its sustained growth and stability.