Pakistan has come to an agreement with two foreign commercial banks for a $1 billion loan, carrying an interest rate of about 7.6%. This loan is being secured with the backing of the Asian Development Bank (ADB) due to Pakistan’s low credit rating.
Before the final terms are set and the loan is disbursed, it needs the green light from the ADB’s $500 million guarantee, which the Manila-based agency’s board is expected to approve on May 28. According to government sources, Pakistan can access up to $1.5 billion in foreign commercial loans based on this $500 million guarantee.
When asked if an agreement had been finalized between the government and the two foreign banks regarding the ADB-supported $1 billion loan, Ministry of Finance spokesperson Qumar Abbasi did not provide a response.
Sources indicate that the government has successfully negotiated a $1 billion loan for a five-year term. This will mark the first foreign commercial agreement signed for five years, which should help mitigate refinancing risks.
The negotiations are taking place with Standard Chartered Bank (SCB) and Dubai Islamic Bank (DIB), according to officials from the finance ministry. They mentioned that the interest rate would be set at the Secured Overnight Financing Rate (SOFR) plus 3.25%. This effectively means an interest rate of around 7.6%, which is a floating rate and will adjust based on changes in the SOFR.
The foreign commercial banks are set to wrap up their procedural formalities once the ADB guarantee gets the green light next month. The government is optimistic that the loan will be disbursed in the latter half of June, which should give a nice boost to its foreign exchange reserves before the current fiscal year wraps up.
Right now, Pakistan’s gross reserves sit at $10.6 billion, but the government aims to push that figure over $14 billion by the end of June. This increase is expected to come from better-than-anticipated remittances, a new $1 billion commercial loan, and $1.3 billion in refinancing of Chinese loans, according to sources.
The ADB will charge a small upfront fee for providing the guarantee. Even with a recent upgrade in ratings, Pakistan’s credit rating is still on the lower side at B negative, which is two notches below investment grade. Fitch has moved Pakistan from a substantial default risk to a high risk of default rating.
Finance Minister Muhammad Aurangzeb recently met with Moody’s credit rating agency in Washington, where he shared insights about Pakistan’s fiscal health, including its current account surpluses, decreasing inflation, stable exchange rate, and foreign reserves. They also discussed the Panda Bond initiative, and both parties expressed interest in exploring future collaborations. Moody’s is anticipated to upgrade Pakistan’s rating in the first week of May.
Back in September, the government agreed to a term sheet with SCB in London for two loans amounting to $600 million, albeit at a steep interest rate of around 11%. However, following a report in The Express Tribune, the government decided to postpone the deal until the overall macroeconomic situation improves. Fortunately, Pakistan’s external sector has shown signs of stabilization, with the IMF reducing the current account deficit forecast from $3.7 billion to just $400 million. This has lessened the need for foreign loans.
For the current fiscal year, the government has set aside $3.8 billion for foreign commercial loans, but so far, it has only secured about $500 million, primarily through a local commercial bank, largely due to its low credit rating.
Saudi Arabia has yet to release the $100 million per month from the deferred oil payment facility, mainly due to some procedural hiccups on Pakistan’s side. A couple of months ago, Pakistan and Saudi Arabia struck a $1.2 billion loan agreement to purchase oil on deferred payments. Islamabad is set to pay a 6% interest on this loan, which will be used to buy crude oil from the kingdom, with a monthly limit of $100 million.
On Tuesday, Finance Minister Muhammad Aurangzeb had a meeting with Sultan bin Abdulrahman Al-Murshid, the CEO of the Saudi Fund for Development (SFD), during the World Bank-IMF annual meetings.
According to a statement from the Ministry of Finance, “Aurangzeb urged for a quicker disbursement of funds under the Saudi oil facility, promising that the necessary oil shipment documents would be submitted promptly.”
The oil facility just became operational a few days ago after Aramco and two Pakistani oil refineries finalized the operational agreement. However, those refineries have yet to provide the shipment documents.
Additionally, the finance minister asked the Saudi Fund for Development for a loan to help construct the N-25 highway in Balochistan, as stated by the Ministry of Finance.
Last week, Prime Minister Shehbaz Sharif announced an extra charge of Rs8 on every litre of petrol and Rs7 on diesel to help fund the N-25 highway project. This highway stretches from Karachi all the way to the Chaman border. The government is aiming to collect around Rs120 billion by placing this additional cost on all petrol and diesel users.
For the current fiscal year, the government has set aside $23.4 billion in foreign loans, which includes $13 billion in rollovers from China, Saudi Arabia, the United Arab Emirates, and Kuwait. Pakistan has recently repaid a $1.3 billion commercial loan to China, with plans to refinance it shortly.
Aurangzeb also met with representatives from Deutsche Bank, sharing Pakistan’s interest in re-entering financial markets. This includes the potential issuance of Panda and ESG bonds, which would be based on the country’s improved macroeconomic stability and credit rating.
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Q1. What recent financing deal has Pakistan negotiated with foreign institutions?
Pakistan has reached a preliminary agreement with Standard Chartered Bank and Dubai Islamic Bank for a $1 billion external credit facility. This five-year arrangement is backed by a $500 million guarantee from the Asian Development Bank (ADB).
Q2. What is the cost of this external financing?
The agreed interest rate is based on the Secured Overnight Financing Rate (SOFR) plus 3.25%, which brings the effective rate to around 7.6%. It’s a floating rate that will adjust with market conditions.
Q3. Has the ADB approved its guarantee for this funding package?
The ADB’s board is expected to approve the $500 million guarantee on May 28. This approval is essential before the disbursement of the funds can proceed.
Q4. Why is the ADB’s backing crucial for this transaction?
Due to Pakistan’s low credit rating (currently B- by Fitch), securing affordable foreign capital independently is challenging. ADB’s involvement helps mitigate credit risks for lenders and enables Pakistan to access financing at comparatively better terms.
Q5. How will this new financial package help Pakistan?
The five-year funding arrangement will assist Pakistan in reducing its refinancing risk and boosting its foreign exchange reserves, currently at $10.6 billion, with a goal of exceeding $14 billion by the end of June.
Q6. What other foreign capital inflows are expected soon?
Alongside this commercial financing, Pakistan expects inflows from Chinese loan refinancing ($1.3 billion), better-than-expected remittances, and operationalization of a $1.2 billion Saudi oil payment deferral facility.
