Pakistan takes $1.5 billion loan from China to repay debt to Saudi Arabia

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China has agreed to immediately provide $1.5 billion financing line to Pakistan to help the country repay the $2 billion Saudi Arabia debt, reports said.

Out of $2 billion, Pakistan will reportedly return the $1 billion on Monday and the remaining $1 billion in January.

Sources, however, said that this time around, China has not given the loan from its State Administration of Foreign Exchange, commonly known as SAFE deposits, nor has it extended a commercial loan.

Instead, this time, China is providing the $1.5 billion loan by augmenting the size of 2011 bilateral Currency-Swap Agreement (CSA), by an additional 10 billion Chinse Yuan or around $1.5 billion, a report in The Express Tribune reported sources as saying. This has increased the size of the overall trade facility to 20 billion Chinese Yuan or $4.5 billion.

What is Currency-Swap Agreement (CSA)

In December 2011, the bilateral Currency Swap Agreement was signed between the State Bank of Pakistan (SBP) and the Peoples Bank of China (PBOC) “in order to promote bilateral trade, finance direct investment and provide short-term liquidity support”, according to the central bank.

The original agreement was renewed in December 2014 for a period of three years with an overall limit of 10 billion yuan or $1.5 billion. It was again extended in May 2018 for a period of three years. This time the amount wad increased to 20 billion Yuan or $3 billion.

This agreement is slated to expire in May next year, however, SBP has decided to request China to further extend it for three more years, reports said.

CSA is basically a Chinese trade finance facility that Pakistan has been using since 2011 in order to repay foreign debt and keep its gross foreign currency reserves at comfortable levels instead for trade-related purposes.

Under this agreement, the additional $1.5 billion Chinese loan will reportedly not reflect on the book of the federal government and it will not be treated as part of Pakistan’s external public debt.

Spokespersons for State Bank of Pakistan (SBP) and Pakistan’s finance ministry neither denied nor confirmed the reports. The spokesperson for the central bank, however, evaded the questions while the ministry of finance said that it was a “bilateral confidential matter”.

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