China’s banks have already extended tens of billions of dollars in infrastructure loans to support the $57bn China-Pakistan Economic Corridor (CPEC), a centrepiece of Beijing’s Belt & Road Initiative which seeks to increase its geopolitical influence.
However Pakistan’s foreign exchange reserves are dwindling and it is expected to seek a bailout of more than $10bn shortly from the IMF and further funding from allies, including China and Saudi Arabia, to avoid a currency crisis.
Therefore Chinese banks are increasingly wary about lending to Pakistan as emerging markets currency volatility threatens the incoming coalition government’s efforts to close an external financing gap, amid mounting US opposition to a possible IMF bailout.
The newly elected Prime Minister Imran Khan and his Pakistan Tehreek-e-Insaf Party only has a thin majority in parliament and the plan faces strong domestic and international opposition. Therefore the IMF may seek to impose conditions on any new borrowing and the US has voiced strong opposition and concern that any funding should not be used to repay Chinese lending.
“As a commercial bank we will of course use extra caution when considering new loans to Pakistan,” one Beijing-based banker said.
The 40% devaluation of the Turkish lira so far this year amid a deepening economic crisis, together with pressure on the Russian rouble since early August, has amplified Chinese concerns about security in Pakistan as Beijing defends the value of the renminbi amid a trade war against the United States.
“Our bank has just tightened all sovereign loans to non-developed countries and we are now reassessing country risks. We are on close watch against any further black swan events,” a second source said.
Pakistan’s new government is due to repay a $255m sovereign loan in late September. The one-year bullet loan was signed with four banks, including sole bookrunner Credit Suisse and two Chinese lenders, in September 2017, according to data from Loan Pricing Corp.
Chinese banks have increased their commitment to Pakistani sovereign loans in recent years and policy lenders China Development Bank and the Export-Import Bank of China (Chexim) are playing a leading role in financing CPEC’s construction of ports, power stations and transport links.
These loans are at the centre of a debate on whether the IMF should help Pakistan for the second time in five years. Pakistan is also seeking financing from alternative sources and is lining up a $4bn loan from Saudi-backed Islamic Development Bank, according to media reports in early August.
Pakistani officials have tried to shrug off US concerns and decouple the possible IMF bailout from Chinese loans for CPEC.
Pakistan’s ex-finance minister Miftah Ismail told Reuters earlier this month that total Chinese debt repayment and profit expatriation by Chinese companies combined would stay below $1bn per annum until 2023.
The loans, which have 30-year tenors and five-year grace periods, are a combination of zero-interest debt, concessionary and some market-rate borrowings, with weighted-average interest rates of about 2%, he said.
Reuters also reported in July that in the first 10 months of the fiscal year, China lent Pakistan $1.5bn in bilateral loans, along with $2.9bn of commercial bank loans mostly from Chinese lenders.
Official data on Chinese lending to Pakistan is not available. CDB approved 10 projects in Pakistan and committed $1.3bn in loans as of the end of March 2015, according to its website. That figure had risen to 16 projects and $4.6bn loans by mid-June 2016, a report by the official People’s Daily said.
CDB has become more prudent and rejected some loans for Pakistan more recently, a third source said. Most of CDB’s loans are extended under government instructions, but it makes some commercial loans. CDB was not immediately available to comment.
The policy bank does not have a branch in Pakistan, but China’s state-owned commercial lenders are increasing their presence.
Bank of China opened a Karachi branch last November. ICBC was the first Chinese bank to start operations in Pakistan in 2011, and now has three branches in Karachi, Islamabad and Lahore.
ICBC is also the most active Chinese lender in Pakistan’s syndicated sovereign loans. It was the mandated lead arranger and bookrunner along with Credit Suisse of Pakistan’s latest $565m one-year bullet deal signed in July and took a final hold of $225m.
Other banks that have committed to Pakistan’s sovereign loans include Bank of China, Bank of Zhengzhou, China Minsheng Banking Corp, Chexim and Postal Savings Bank of China.
“We are worried if our existing loans will get repaid in a timely fashion,” the second source said. “We’ll be closely watching the negotiations between Pakistan and IMF to see what restrictions the fund will impose.”
