Pakistan has decided to take a $600 million short-term loan from Standard Chartered Bank (SCB) to replenish its foreign exchange reserves, as disbursements on account of foreign commercial loans and sovereign bonds have so far remained well below official expectations.

Government sources said the country has accepted a term sheet for a $600 million trade finance facility from SCB, London. The loan is being taken for a period ranging from six to nine months, they added.

The facility carries an interest rate of around 6.3%, which is slightly lower than the cost Islamabad is paying on the $3.5 billion debt obtained from the United Arab Emirates (UAE). The government had requested the UAE to reduce the interest rate to around 3%, citing improvements in the country’s credit rating and overall economic conditions.

Pakistan will pay an interest rate equivalent to the Secured Overnight Financing Rate (SOFR) plus 2.6%, which translates into 6.3%. The SOFR rate stood at 3.66% on Tuesday.

According to the sources, the formal agreement is expected to be signed shortly, after which the country will be able to draw down the amount against imports of crude oil and gas.

The Ministry of Finance spokesperson did not respond to a question on whether the government had decided to secure the $600 million facility from the SCB for the shorter term.

Pakistan has once again begun looking towards both new and traditional external financing channels in light of recent developments. The International Monetary Fund (IMF) is also expected to take a fresh look at foreign debt repayments and anticipated disbursements to help sustain these payments without putting pressure on gross foreign exchange reserves.

For the current fiscal year, the government had budgeted $3.1 billion in foreign commercial loans as part of a broader plan to take roughly $26 billion in foreign loans. However, according to the Ministry of Economic Affairs, the country received only $54 million in foreign commercial loans during the first half of the fiscal year.

Pakistan also repaid a $700 million loan to the China Development Bank (CDB) this week, which temporarily pulled down the central bank’s gross official foreign exchange reserves to $15.5 billion as of February 10. The government hopes the CDB will refinance the $700 million in June, alongside the refinancing of another $1 billion commercial loan.

Despite claims of improved credit ratings, the government remains sceptical about a significant return to global capital markets in this fiscal year too. For the current fiscal year, it had budgeted only $400 million in sovereign bond-based borrowing, but no transaction has materialised so far.

Finance Minister Muhammad Aurangzeb had earlier announced that Panda bonds would be issued in the Chinese market before the end of February to raise $250 million. However, according to the sources, progress has not moved in the government’s favour so far.

In the last fiscal year, the government also relied on two foreign commercial bank loans backed by guarantees issued by the Asian Development Bank (ADB) due to Pakistan’s weak credit profile.

Another govt expectation hinges on potential new investment from Saudi Arabia. Sources said internal discussions have taken place on both sides, but there is still no clarity regarding the timing or size of any prospective transactions.

The government aims to raise gross official foreign exchange reserves to over $18 billion by the end of June. This would depend on better-than-expected remittance inflows, new commercial borrowing and the retention of $12.5 billion in cash deposits from the UAE, Saudi Arabia and China.

Out of the budgeted $26 billion in foreign loans, the government has so far received only $5.7 billion, including IMF financing. Meanwhile, exports plunged by 7% during the first seven months of the current fiscal year.

The outlook for foreign direct investment is even more concerning, as foreign investment decreased by over 41% to just $981 million during the first seven months of the fiscal year, according to central bank data.