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China to lend $2bn to Pakistan

02 January, 2019

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China has pledged to lend at least $2bn to Pakistan to shore up its foreign exchange reserves and prevent further devaluations of the rupee against the dollar, two senior government officials have told the Financial Times.

The financial support comes as the government of Prime Minister Imran Khan is struggling with a weakening fiscal position, high debt repayments and dwindling reserves.

“China’s promise to Pakistan is an indication of their commitment to help us avoid a crisis. If the rupee falls sharply and we need to prevent its slide, we can turn to China,” said a senior government official in Islamabad.

Chinese officials were not immediately available for comment. The promised financial support signals deepening economic ties between China and Pakistan even as Islamabad is negotiating with the IMF for a potential $7bn to $8bn loan.

Pakistan’s Finance Ministry and the IMF are due to resume discussions later this month on details of the package, which is expected to come with tough conditions, such as slimming down the country’s bloated state-owned enterprises through job cuts.

The rupee has lost more than a fifth of its value against the dollar since late 2017 and Fitch has cut Pakistan’s debt rating deeper into junk territory last month. Pakistan’s foreign reserves, at $7.3bn, have dropped to about one and a half months of import cover, regarded as a critically low level, said economists.

After decades of close military co-operation, Beijing has been stepping up financial support for Pakistan, with Chinese state-backed banks lending $4bn to Islamabad in the year ending June 2017. China has committed to invest more than $60bn in infrastructure, energy, railway and road projects in Pakistan under the China-Pakistan Economic Corridor, a centre-piece of Chinese President Xi Jinping’s Belt and Road Initiative.

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