China’s response to government's efforts to extend debt maturities encouraging

Pakistan is optimistic about creating some fiscal space as China's response to its request to extend the maturity of debt for nine power plants built by Chinese companies under the China-Pakistan Economic Corridor (CPEC) is encouraging.

This extension is crucial for Pakistan as it aims to create enough financial space to lower electricity prices, which have tripled in recent years, even surpassing house rents.

Finance Minister Muhammad Aurangzeb, in an interview with Bloomberg, highlighted the government's efforts to extend the debt maturities.

He mentioned that during his visit to China in July, he discussed the debt situation with Chinese officials. Although the talks are still in the early stages, the initial response from China has been encouraging.

Pakistan has been a key participant in China's Belt and Road Initiative, which has significantly helped the country overcome its long-standing electricity shortages.

In a separate meeting with a delegation from CitiBank, led by Jay Collins, Vice Chair of Public Sector, Aurangzeb said the government would explore tapping into the international capital markets in due course.

This meeting took place on the sidelines of the Annual Meetings of the World Bank Group and International Monetary Fund (IMF) in Washington DC, held from October 21 to October 26, 2024.

Aurangzeb emphasized the need for Pakistan to increase its tax-to-GDP ratio from below 10% to 13.5% to avoid future IMF loans. Additionally, Pakistan plans to seek around $2 billion in additional financing from the IMF through its climate resiliency fund.

The State Bank of Pakistan (SBP) has reported improvements in the country's macroeconomic conditions, supported by stabilization policies, successful engagement with the IMF, reduced uncertainty, and a favorable global economic environment. Inflation has decreased to its lowest level in almost four years, with October's Consumer Price Index (CPI) expected to be around 6.3%.

Pakistan's short-term local government bonds are set to receive their first annual inflow from foreign investors in five years, driven by high yields and a stable rupee. The benchmark stock index has surged 70% in the past 12 months, making it the world's best performer.

The central bank has cut its benchmark interest rate by 450 basis points over three consecutive meetings, bringing it down to 17.5% from a record high of 22%. The next meeting on November 4 may see further reductions in the policy rate, according to Aurangzeb.