Foreign Loan Inflows Drop to $3.6 Billion Amidst Slower Disbursements

December 24, 2024 Mahi Bukhari

Introduction

Pakistan’s foreign loan disbursements have faced a significant decline in the first five months of the current fiscal year. The disbursements for the period July-November amounted to only $3.6 billion, a drop of 43% compared to the previous year’s figures. The slowdown in disbursements is a cause for concern, as it comes at a time when Pakistan is struggling to meet its external financing needs.

In this article, we will explore the reasons behind the decline in foreign loan inflows, the role of bilateral and multilateral lenders, and the impact of these changes on Pakistan’s financial health.

Overview of Foreign Loan Inflows

The Decline in Foreign Loan Disbursements

In the first five months of the fiscal year 2024-25, foreign loan disbursements to Pakistan decreased significantly. The country received $3.6 billion from bilateral and multilateral creditors, compared to $6.4 billion during the same period in the previous fiscal year. According to the Ministry of Economic Affairs and the State Bank of Pakistan, the disbursements were lower than expected, reflecting a slower-than-anticipated release of funds.

This decline comes at a time when Pakistan is facing an increasingly difficult financial situation, including higher debt maturities and mounting external liabilities. The reduction in foreign inflows has left Pakistan with a challenging financial outlook for the remainder of the fiscal year.

Breakdown of Disbursements

Out of the total $3.6 billion disbursed, the International Monetary Fund (IMF) played a significant role, with its first loan tranche being a major contributor. Excluding the IMF’s installment, the bilateral and multilateral lenders disbursed less than $2.6 billion in the first five months. This shortfall highlights the ongoing challenges in securing external funding, particularly from traditional lenders like Saudi Arabia, the UAE, and China.

Comparison with Previous Year

In the first five months of the previous fiscal year, Pakistan received a substantial $6.4 billion, largely driven by the support from Saudi Arabia and the UAE. However, this year, the country has struggled to replicate that level of inflows, which has exacerbated the financial pressure on Pakistan’s economy.

Key Contributors to the Decline

Slow Movement of Fund Releases

A key factor behind the decrease in foreign loan disbursements is the slower-than-expected release of funds. Many of the rollovers and loan agreements, particularly those with Saudi Arabia and the UAE, typically occur later in the fiscal year, during the December-June period. As a result, the disbursements recorded during the first five months of FY25 account for only 15% of the government’s annual estimate of $24 billion.

Impact of Political and Economic Conditions

Pakistan’s financial difficulties are also influenced by the country’s political and economic climate. Political instability, including strained relations between the government and opposition, has had a negative impact on investor confidence. Additionally, Pakistan’s credit rating remains low, making it more difficult to secure loans from international lenders.

Financial Strain Due to Debt Maturities

Pakistan faces substantial debt maturities in the current fiscal year. The country is obligated to repay $12.7 billion in cash deposits and $3.8 billion in Chinese commercial loans. These obligations, which total $16.5 billion, exceed Pakistan’s official foreign exchange reserves, making it difficult for the government to meet its external financing needs.

Government’s Borrowing and Debt Management

Estimated Foreign Loan Inflows for FY25

The federal government has estimated foreign loan inflows of $24 billion for the current fiscal year, including new borrowings and rollovers of existing loans. These inflows are crucial for financing the country’s budget deficit and meeting external debt obligations. The rollover of $5 billion from Saudi cash deposits and $4 billion from Chinese loans are expected to contribute significantly to the total foreign loan inflows.

However, despite these expectations, the government is facing challenges in securing the required funds. The disbursement figures for the first five months indicate that Pakistan is falling short of its financing targets.

Challenges in Securing New Loans

Pakistan is also struggling to secure new loans from traditional sources. For example, Saudi Arabia has not yet approved a $1.2 billion oil facility, which would have provided much-needed financial relief. Additionally, project funding from Saudi Arabia has been moving at a slow pace, further compounding the country’s financial difficulties.

The Role of the IMF

The International Monetary Fund (IMF) has been a key player in Pakistan’s foreign loan disbursements. However, due to the country’s low credit rating and slow progress on various projects, Pakistan has been unable to unlock additional financing lines from the IMF. While the IMF’s program had been expected to help secure other sources of financing, the country’s financial struggles have made it difficult to meet the program’s requirements.

Multilateral and Bilateral Creditors

Multilateral Disbursements

Multilateral lenders, such as the Asian Development Bank (ADB), the World Bank, and the Islamic Development Bank, have been significant contributors to Pakistan’s foreign loan inflows. During the first five months of FY25, multilateral creditors released $1.4 billion, constituting 32% of the annual estimate. This figure was an 88% increase from the previous year, largely due to a $500 million loan from the ADB for the Climate and Disaster Resilience Enhancement Programme.

The ADB disbursed a total of $764 million for various projects, exceeding its previous fiscal year disbursement. However, the World Bank’s contribution was lower, amounting to only $398 million, which was 16% less than the previous year.

Bilateral Disbursements

Bilateral creditors, including Saudi Arabia, China, and France, have been less active in disbursing funds this year. The total disbursement from bilateral creditors amounted to just $202 million in the first five months, a 63% decline compared to the previous year. China’s disbursements accounted for the largest share, with $97 million, followed by $90 million from France.

Pakistan’s Financing Strategy

Sovereign Bonds and Other Financial Instruments

In addition to loans from bilateral and multilateral creditors, Pakistan has planned to raise funds through the issuance of sovereign bonds. The government has targeted $1 billion in sovereign bonds for FY25, but so far, there has been no progress in this area. The finance minister has announced that Panda bonds will be issued by December, but it remains to be seen whether this will help bridge the funding gap.

Investment in Naya Pakistan Certificates

Pakistan has also made progress in attracting investment through Naya Pakistan Certificates. The country received $735 million through these certificates, which is higher than the annual estimate. This investment is part of Pakistan’s broader strategy to attract foreign capital and bolster its foreign exchange reserves.

Conclusion

Pakistan’s foreign loan inflows have significantly dropped in the first five months of FY25, highlighting the country’s ongoing financial challenges. The decline in disbursements is due to a combination of factors, including slow fund releases, political instability, and the country’s inability to meet the IMF program’s requirements. As Pakistan struggles to meet its external financing needs, the government must explore alternative sources of funding and work towards improving its credit rating to secure future loans.

FAQs

1. Why did Pakistan’s foreign loan disbursements drop in the first five months of FY25?

The drop in disbursements was primarily due to slower-than-expected fund releases, political instability, and Pakistan’s low credit rating, which made it harder to secure loans.

2. How much did Pakistan receive from multilateral creditors during the first five months of FY25?

Pakistan received $1.4 billion from multilateral creditors, constituting 32% of the annual estimate.

3. What role did the IMF play in Pakistan’s foreign loan disbursements?

The IMF’s first loan tranche contributed significantly to the total disbursements. However, Pakistan has struggled to unlock additional financing lines from the IMF due to its low credit rating.

4. How much of the foreign loan inflows does Pakistan expect for FY25?

Pakistan expects a total of $24 billion in foreign loan inflows for FY25, including new borrowings and rollovers of existing loans.

5. Has Pakistan made progress in issuing sovereign bonds?

Pakistan has planned to raise $1 billion through sovereign bonds, but so far, no progress has been made. The finance minister has announced that Panda bonds will be issued by December.