High interest rate, Pakistan refuses to take 490 million dollar loan

Cost of loan 8 percent, Ministry of Finance was expecting 6 percent interest rate

Islamabad: Pakistan has rejected offer of 490 million dollars trade loan from International Trade Finance Corporation (ITFC), subsidiary of Islamic Development Bank Group, due to high interest rate.

According to officials of Ministry of Finance, cost of loan was about 8 percent, while government was expecting that this facility could be obtained at about 6 percent interest rate.

According to official sources, Debt Management Office of Ministry of Finance took this decision last week. After rejecting this loan offered for period of one year, Ministry of Finance has directed Economic Affairs Division to explore possibilities of obtaining new loan facility at competitive rate from ITFC or any other source.

Development has come at time when Pakistan's overall financial needs remain high. According to annual debt plan of Ministry of Finance for financial year 2026-27, country's overall financial needs are estimated to remain 28,647 billion rupees, which is equal to about 20 percent of Gross Domestic Product (GDP).

According to report, these needs include federal fiscal deficit of about 7,000 billion rupees and repayment of principal amount of domestic and foreign loans of more than 21,000 billion.

Ministry of Finance has stated net external financial needs as 813 billion rupees, i.e. about 2.8 billion dollars, however volume of new loans will be more than this due to repayment of loans.

International Monetary Fund in its latest report has predicted Pakistan's current account deficit to remain one percent of GDP, i.e. about 4.5 billion dollars. This is at least 1.5 billion dollars more than recent estimate of Pakistani authorities, 2.5 to 3 billion dollars.

According to IMF, in last financial year Pakistan's overall financial needs were equal to about 22 percent of GDP.

According to sources, Pakistan did not accept ITFC's offer because overall cost of this loan was even higher than about 6.1 percent market rate of Pakistani bond maturing in December 2027.

Earlier, Pakistan had taken 300 million dollars trade loan obtained from Bahrain and Dubai through United Bank Limited in August, income tax exemption regarding bank's profit was given on this loan.

Officials say that in such facilities of foreign trade loans, lenders impose condition that tax applicable in Pakistan will not be applicable on them, so this burden has to be borne by government or exemption from tax has to be given. Pakistan had also obtained 3 billion dollars through Eurobonds in September.