As Pakistan faces a $2 billion external financing gap, the government is increasingly turning to commercial loans from Middle Eastern banks, with borrowing costs from the International Monetary Fund (IMF) surpassing 5%, making it an expensive option.
On Thursday, Finance Minister Muhammad Aurangzeb met with Dubai Islamic Bank in his second outreach to Gulf banks within a week, following an earlier meeting with Mashreq Bank. The discussions with Dubai Islamic Bank’s Group CEO, Dr. Adnan Chilwan, focused on Pakistan’s economic prospects and potential investment opportunities in Islamic banking, infrastructure, and SMEs development. The finance minister invited the bank to increase its investments in Pakistan, emphasizing the government’s commitment to maintaining macroeconomic stability and facilitating foreign investment.
Next week, finance ministry officials are set to negotiate loan terms with foreign bankers, continuing efforts to bridge the financing gap. This comes after a commercial loan offer from a European bank with double-digit interest rates was deemed unfeasible, and the IMF indefinitely postponed the approval of a $7 billion Extended Fund Facility (EFF) due to Pakistan’s failure to secure additional financing.
Despite the delay, the finance minister remains optimistic that the IMF will approve the new EFF in September. Pakistan’s foreign exchange reserves stand at $9.3 billion, supported by significant purchases by the central bank. However, high financing costs and a low credit rating continue to challenge Pakistan’s engagement with foreign commercial banks.
Dubai Islamic Bank has shown interest in providing syndicated financing, but foreign lenders are closely monitoring whether the IMF will extend support to Pakistan. Currently, Pakistan’s credit rating is CCC+, below investment grade, resulting in higher interest rate demands from commercial banks. The finance minister hopes for a credit rating upgrade by the next fiscal year.
In a briefing to the Senate Standing Committee on Economic Affairs, the Ministry of Finance and the State Bank of Pakistan (SBP) highlighted Pakistan’s historical engagements with the IMF. An SBP executive revealed that the last Stand-By Arrangement with the IMF carried an average interest rate of 5.1%, and similar rates are expected for future loans unless global interest rates decline.
The briefing also noted that interest rates on IMF loans have risen steadily since 2008. The 2019 IMF programme, for instance, was secured at an average interest rate of 3.41%. The finance ministry clarified that contrary to popular belief, Pakistan has completed nine out of 24 IMF programmes since 1958, challenging the misconception that only two programmes were completed.
As Pakistan navigates these financial challenges, the government’s intensified efforts to secure commercial loans from Middle Eastern banks highlight the complexities of balancing external financing needs with the high costs of borrowing.
