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China has agreed to extend a USD 2 billion debt on existing terms, providing much-needed relief to debt-trapped Pakistan. Initially, China sought a hike in interest rates, but an understanding has been reached to roll over the loan with no changes in terms. This agreement comes as Pakistan faces challenges in maintaining foreign exchange reserves, relying on deposits from friendly countries.

The USD 2 billion loan, maturing on Pakistan Day, March 23, will have its repayment period further extended, according to officials from the Ministry of Finance. Despite China's initial request for increased interest rates, it has informally communicated its decision to extend the repayment period, awaiting a formal response from Pakistan.

Interim Prime Minister Anwaarul Haq Kakar formally requested the Chinese government to roll over the maturing loans. This move comes amidst Pakistan's significant interest payments to China, Saudi Arabia, and the UAE, totaling Pakistani Rs 26.6 billion in the last fiscal year alone.

The surge in interest costs, up by 118 per cent in the previous year, is attributed to currency devaluation. Despite efforts to borrow from regional countries during economic hardships, Pakistan's repayment capacity remains weak, leading to extensions of loans at maturity.

Following agreements with the International Monetary Fund, Saudi Arabia and the UAE increased their exposure to Pakistan, totaling USD 12 billion. However, the cost of interest on these deposits is expected to rise substantially this fiscal year.

Last year, Pakistan paid Pakistani Rs 42.1 billion to China for using a USD 4.5 billion trade finance facility, part of the SBP's USD 8 billion in gross official foreign exchange reserves. However, Pakistan's gross reserves are now insufficient to service these Chinese facilities, highlighting the country's ongoing economic challenges.

As Pakistan navigates its financial landscape, the agreement with China provides temporary relief but underscores the need for long-term fiscal reforms to address debt sustainability and strengthen the economy's resilience.