Pakistan's 'all-weather' friend China has bailed out the country once again as the latter has provided an immediate $1.5 billion financing line to repay the $2 billion Saudi Arabia debt. Pakistan has to repay $1 billion on Monday and the remaining $1 billion is due next year in January.
Notably, China did not grant the loan from its State Foreign Exchange Administration, usually referred to as SAFE deposits, or extend the commercial loan. Instead, the two countries agreed to raise by an additional 10 billion Chinese Yuan or about $1.5 billion the scale of the bilateral Currency-Swap Agreement (CSA) for 2011.
The size of the total trade facility has thus increased to 20 billion Chinese Yuan, or $4.5 billion. Since 2011, Pakistan has been using the CSA as a Chinese trade finance facility to repay foreign debt and keep its gross foreign currency reserves at a comfortable level rather than for trade-related purposes.
Currency Swap agreement
As per the State Bank of Pakistan (SBP), the bilateral Currency Swap Agreement between the SBP and the Peoples Bank of China (PBOC) was signed in December 2011 "to promote bilateral trade, finance direct investment and provide short-term liquidity support".
In December 2014, the original agreement was extended for a three-year duration with a total cap of 10 billion yuan or 1.5 billion dollars. It was once again extended for a period of three years in May 2018. The sum has been raised to 20 billion yuan or three billion dollars. This agreement is due to expire in May of next year, but SBP has asked China to extend the period for three more years.
Over the past few years, China has been Pakistan's biggest creditor. Initially planned to facilitate bilateral trade in the respective local currencies, the trade facility was used to pay off foreign debt. The $3 billion in cash is part of the central bank's estimated $13.4 billion in foreign-currency reserves. Pakistan's foreign funds have dried up since IMF suspended its $6 billion credit to Islamabad.
