Islamabad: Facing financial challenges, Pakistan has formally requested fresh loans amounting to USD 600 million from two Chinese banks, signalling a critical step in its ongoing negotiations with the International Monetary Fund (IMF) for the release of the second tranche of a USD 3 billion bailout package, The News International reported.

As reported by a local newspaper, the Pakistani government is actively engaged in discussions with the Industrial and Commercial Bank of China (ICBC) and the Bank of China, seeking a combined loan of USD 600 million. Each bank has been approached to provide USD 300 million in financing. The negotiations have progressed significantly, with expectations that the loans will be secured by the next month, according to the report.

In recent years, China, Pakistan's steadfast ally, has emerged as a crucial source for meeting Pakistan's urgent financing needs. China has extended various forms of financial support, including loans from SAFE deposits, concessionary loans, and commercial loans, in efforts to bolster Pakistan's economy. In June of this year, China played a pivotal role in preventing a further decline in Pakistan's critically low foreign currency reserves by adjusting the repayment of USD 1.3 billion, The News International reported.

Despite budgeting USD 4.5 billion in foreign commercial loans, Pakistan has faced challenges in securing financing due to poor credit ratings, heightened risks to debt sustainability, and a fragile macroeconomic situation. China has been a significant contributor, providing USD 21.2 billion in loans for general budget support since 2000, accounting for 30 per cent of the total lending to Pakistan, according to AidData. These loans have been instrumental in averting defaults and bolstering Pakistan's foreign currency reserves.

Acknowledging its USD 6.5 billion borrowing plan, the Pakistani government has emphasised its dependence on macroeconomic conditions. Successful completion of ongoing talks is anticipated to positively impact Pakistan's low credit ratings, currently characterised as highly risky by three international credit rating agencies. Downgrades have increased the cost of borrowing and posed obstacles to securing new foreign commercial loans.

A stable global interest rate environment and improvements in Pakistan's credit rating are deemed essential prerequisites for accessing the world capital markets. Under the terms of the USD 3 billion IMF bailout deal, Pakistan has committed to adopting a market-based exchange rate regime, The News International reported.