Foreign reserves in Pakistan were reported deficient for the month of July. The government of Pakistan borrowed $700 million in loans from European commercial banks in order to relieve the mounting pressure on foreign reserves. The loan has an interest rate of 4.47% which is slightly lower than the rate of borrowings which Pakistan made through Euro and Sukuk bonds earlier.
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While the rate at which the loan has been acquired is 4.47%, the actual rate that Pakistan will end up paying will be 4.97%. This is because of the 0.5% per annum fee that the World Bank charges as a guarantee between the lender and the borrower, thereby increasing the overall cost of borrowing. A one-time upfront fee of 0.25% has also been paid by Pakistan to the World Bank.
Borrowings have been increasing at an alarming rate for Pakistan with around $9 billion borrowed over the last one year, the highest loan ever borrowed in a single year. Loan from foreign commercial banks alone has been around $3.6 billion. A large part of total borrowing is done with the purpose of paying off previous debts.
Majority of the foreign loans that Pakistan has taken is through competitive bidding process, unlike the previous ways of getting loans through international bonds. World Bank Country Director Illango Patchamuthu tweeted about the current loan, saying that the World Bank has facilitated $1 billion of finance for Pakistan over the last two weeks.
He said that the rates are attractive which will save $120 million in interest payments for the country while the payment period has also been increased from three years to ten years. World Bank had earlier acted as a guarantor in the $350 million loan that was secured to finance the construction of Dasu Dam.
The only major concern here will be how Pakistan will pay this loan back. During the last few years, additional loans have been taken in order to pay off previous loans as there are no major sources of revenue in the country enough to pay off these foreign loans. And the government might turn towards more debt financing in the future to pay off this fresh loan.
The circular debt structure in which Pakistan has been stuck has only one way out for now, and that is to generate revenue from within the country. Rather than relying on foreign debt to pay off previous loans, government should try to invest in setting up factories and industrial units that will generate the required revenue.
Pakistan’s debt and liabilities have shot up to $76.7 billion as of March 2017, according to State Bank of Pakistan.