KARACHI: Concerns are escalating within Pakistan’s financial sector as negotiations continue with Chinese authorities regarding the rescheduling of loans in the energy sector.
On Friday, Finance Minister Muhammad Aurangzeb met with Pan Gongsheng, the governor of China’s central bank, to discuss bilateral financial cooperation, as reported by the People’s Bank of China. Aurangzeb arrived in Beijing on Thursday to negotiate debt relief for the power sector, which includes structural reforms proposed by the International Monetary Fund.
Stakeholders are anxious about the potential outcomes of these discussions, fearing significant impacts on foreign investment and the stability of the exchange rate if negotiations do not yield favorable results. A senior banker closely monitoring the situation remarked, “We believe China will not outright reject Pakistan’s request to reschedule energy sector loans, but the final outcome appears bleak.” He noted that China was initially hesitant to engage in discussions, leading to a delayed visit and indicating possible disagreements over the energy loan negotiations.
For years, China has been Pakistan’s largest foreign investor, with investments from Hong Kong, considered Chinese-approved, also playing a crucial role. Although Chinese investments have declined, they still accounted for the largest share of foreign direct investment (FDI) in FY24. Together, investments from China and Hong Kong represented nearly half of Pakistan’s total inflows, which increased by 17 percent in FY24. However, total inflows were only $1.9 billion, with China contributing $568 million and Hong Kong $338 million, for a combined total of $906 million.
S.S. Iqbal, a senior banker, stated, “Our dependency on China has increased 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.” He added that China has been instrumental in providing loans and rescheduling payments to bolster Pakistan’s reserves.
On March 23, 2018, the People’s Bank of China signed an agreement with the State Bank of Pakistan to provide a $2 billion loan through China’s State Administration of Foreign Exchange (SAFE) to support Pakistan’s foreign exchange reserves. This loan has been rolled over annually since 2018, with the most recent extension granted on February 29, 2024.
While acknowledging China’s support for Pakistan’s reserves, Mr. Iqbal raised concerns about the State Bank halting a $1.8 billion profit outflow to Chinese investors in FY24, questioning how the Chinese could remain calm under such circumstances.
