The budget plans to take on new debt of Rs11 trillion. This will be added to the already crippling level of existing debt, which stands at Rs76 trillion. photo: file
ISLAMABAD:
Pakistan has requested the United Arab Emirates (UAE) to roll over a debt of $2.5 billion for two years and cut interest rate by almost half, including for a $450 million loan taken 30 years ago.
The request was made around the time the UAE president visited Pakistan. After meeting the UAE president, Prime Minister Shehbaz Sharif said that the UAE had agreed to roll over the debt, but he did not give further details. Separately, the World Bank informed Pakistan on Thursday that the country’s investment levels remained below the targets decided under the $20 billion Country Partnership Framework. Central bank and government sources said that Pakistan requested the UAE to roll over the maturing debt of $2.45 billion. Of the total, $1 billion is maturing on Friday and another $1 billion will mature next week.
Sources said that the UAE president had already agreed on the extension but it was not clear whether the debt had been rolled over for one year or two years. Pakistan has sought extension in the debt repayment period for two years and a reduction in interest rate by more than half, according to the central bank sources. Replies from the State Bank and the Ministry of Finance were awaited till the filing of the story.
PM Sharif had reportedly informed the cabinet that a $2 billion repayment was due and the UAE was extending the period. The UAE had extended $2 billion in 2018 for one year. This debt is part of Pakistan’s foreign exchange reserves of $16 billion. Deputy Prime Minister Ishaq Dar said on Wednesday that Pakistan still owed $12 billion to the friendly countries, including $5 billion owed to Saudi Arabia, $3 billion to the UAE and $4 billion to China.
In 2018, the UAE had charged 3% interest rate, but last year it increased the rate by more than double to 6.5%. Sources said that Pakistan requested the UAE to cut the rate to around 3% due to the improvement in Pakistan’s credit rating and lower global rates. The second deposit of $1 billion came in July 2023 as part of the IMF’s condition to arrange $3 billion in further loans to meet the external financing needs before entering a short-term bailout package. Sources said that Pakistan had taken a $450 million loan from the UAE in 1996-97, which remains unpaid, and it is bearing a 6.5% interest on the loan. The government has sought the two-year extension as it will not be able to return the debt during the IMF programme, which is ending in September next year.
Pakistan’s external sector stability depends on the rollover of foreign loans and securing fresh financing from the IMF and the World Bank. The country remains unable to enhance exports, which fell nearly 9% to $15.2 billion during the first half of the current fiscal year. PM Sharif has constituted a committee to evaluate how exports could be increased from last year’s $32 billion to $63 billion in four years. Foreign investment in Pakistan is also not rising despite efforts. A World Bank team on Thursday met with Finance Minister Muhammad Aurangzeb and informed him that “investment levels remain below the ($20 billion) Country Partnership target,” said the Ministry of Finance.
World Bank Country Director Bolormaa Amgaabazar briefed the finance minister about the Country Partnership Framework (CPF). “The World Bank highlighted the importance of accelerating private investment, noting that investment levels remain below the CPF target,” said the ministry.
The bank board approved a 10-year, $20 billion debt package last year but its materialisation hinges on improvement in economic indicators and meeting the policy-based loan conditions.
The finance ministry said that discussions with the World Bank delegation focused on designing a coherent, programmatic investment framework aligned with CPF objectives, covering business environment reforms, state-owned enterprise reforms, trade facilitation, capital market development and export competitiveness. Both sides acknowledged that Pakistan had made progress towards macroeconomic stability through prudent fiscal and monetary policies and emphasised the need to translate the stability into sustained economic growth, higher investment and job creation.
The ministry said that the World Bank proposed a results-based approach with clearly defined policy milestones, performance indicators and targeted technical assistance to support implementation. Pakistan last week sought the World Bank’s support for the refinancing of $36 billion energy debt. The lender said that it may not be able to fund the total debt but could extend guarantees to cover part of it.
“The World Bank also briefed the finance minister on the potential use of policy-based guarantees as part of future operations to support Pakistan’s liability management, refinancing of high-cost debt and innovative financing approaches, subject to achievement of agreed policy milestones,” said the finance ministry. The Express Tribune reported last week that Pakistan had approached the World Bank for its possible role in refinancing $36 billion worth of energy debt taken in the past from multilateral and bilateral creditors to develop power projects.
A preliminary proposal has been developed with the aim of replacing the expensive foreign debt with relatively cheaper multilateral debt to reduce the end-consumer price. According to the proposal, the government wants to ease the power sector debt burden by securing a concessionary, long-term financing. It was seeking a 15-year debt repayment period, including a four-year grace period, they added.
The objective is to cut energy prices to around 8 to 9 cents per unit, which translates into Rs25 per unit.
