Finance Minister Engages Gulf Banks as IMF Loan Costs Exceed 5%
Pakistan Seeks Middle Eastern Loans as IMF Borrowing Costs Exceed 5%
ISLAMABAD: As Pakistan grapples with a $2 billion external financing gap, the federal government is turning to commercial loans from Middle Eastern banks. This decision comes in response to soaring borrowing costs from the International Monetary Fund (IMF), which have now surpassed 5%, making it an increasingly expensive option for the country.
On Thursday, Finance Minister Muhammad Aurangzeb reached out to Dubai Islamic Bank in a bid to secure a commercial loan. This meeting was the second engagement with Gulf banks within a week, following an earlier discussion with Mashreq Bank regarding financing options. During a virtual meeting with Dr. Adnan Chilwan, Group CEO of Dubai Islamic Bank, Aurangzeb explored potential avenues for increased investment in Pakistan. Dr. Chilwan expressed the bank’s willingness to play a significant role in Pakistan’s financial growth, particularly in Islamic banking, infrastructure, and small and medium-sized enterprises (SMEs) development.
The Finance Minister extended an invitation to Dubai Islamic Bank to enhance its investments in Pakistan, emphasizing the government’s commitment to maintaining a stable macroeconomic environment and facilitating foreign investment. Following these discussions, bureaucrats from the finance ministry’s Q Block are scheduled to meet with foreign bankers next week to negotiate loan amounts and interest rates.
Earlier, on August 6, Finance Minister Aurangzeb had disclosed that the government had received a commercial loan offer from a European bank. However, the offer was for double-digit interest rates, which were deemed politically and economically unfeasible. The IMF’s approval of a $7 billion Extended Fund Facility (EFF) has been indefinitely postponed due to Pakistan’s failure to secure the additional $2 billion in financing and rollover agreements for $12 billion in cash deposits from Saudi Arabia, China, and the UAE.
The finance minister remains hopeful that the IMF will approve the new EFF in September. Despite the delays, Pakistan’s foreign exchange reserves currently stand at $9.3 billion, supported by significant purchases from the domestic market by the central bank. Nevertheless, Pakistan has intensified its engagement with foreign commercial banks, facing high financing costs and a low credit rating from international agencies.
Sources indicate that Dubai Islamic Bank is considering providing syndicated financing facilities to Pakistan. The bank is closely monitoring the IMF programme, as foreign lenders are keenly observing whether the IMF will extend its support to Pakistan. Pakistan’s current credit rating stands at CCC+, below investment grade, leading to higher interest rates demanded by commercial banks. Despite this, the finance minister remains optimistic that international credit rating agencies may upgrade Pakistan to investment grade by the next fiscal year.
On Thursday, the Ministry of Finance and the State Bank of Pakistan (SBP) briefed the Senate Standing Committee on Economic Affairs about Pakistan’s interactions with the IMF since 1958. Qader Bakhsh, an executive from the SBP, revealed that Pakistan’s last Stand-By Arrangement with the IMF carried an average interest rate of 5.1%, making it a costly deal. The new IMF loan is expected to have similar rates unless global interest rates decline. The IMF interest rate is determined by the Special Drawing Rights (SDR) basket price, plus a 1% base rate and additional surcharges based on loan volume and duration. A 2% surcharge applies if a country borrows more than 187.5% of its IMF quota, with an additional 1% surcharge for borrowing periods exceeding three years.
Historically, lending by the World Bank, the Asian Development Bank (ADB), and the IMF was considered affordable. However, due to Pakistan’s increasing borrowing needs and limited capacity to sustain such debt, these institutions have raised their interest rates. Data from the finance ministry shows that interest costs on IMF loans have steadily risen since 2008, with rates increasing from 1.6% in 2008 to 3.41% in 2019.
Maryum Kayani, Joint Secretary at the Ministry of Finance responsible for IMF affairs, reported that since 1958, Pakistan has entered into 24 IMF programmes and four special one-time facilities. Under these agreements, Pakistan has signed loans worth 28.3 billion SDRs (approximately $40.5 billion), receiving 21.3 billion SDRs (about $28.6 billion) with the remaining amounts undisbursed. Contrary to popular belief, Pakistan has completed nine of its 24 IMF programmes, including those from 1965-66, 1968-69, 1973-74, 1974-75, 1977-78, 1988-90, 2000-01, 2013-16, and 2023-24.