ISLAMABAD   -   China has once again backed Pakistan amid an economic crisis and rising inflation.

Pakistan’s foreign exchange reserves fell below $10 billion this week, threatening to turn into a full-blown economic crisis unless policy makers secure a loan from the International Monetary Fund which is now expected soon as the government has almost accepted all demands of the IMF.

As Pakistan struggled economically, Chinese banks agreed to refinance Pakistan with $2.3 billion worth of funds in a massive relief for the cash-starved country to help it bolster its depleting foreign exchange reserves.

Finance Minister Miftah Ismail said last week that the terms and conditions for refinancing have been agreed and the inflow is expected “shortly” after some routine approvals from both sides.

“Good news: The terms and conditions for refinancing of RMB 15 billion deposit by Chinese banks have been agreed. Inflow is expected shortly after some routine approvals from both sides. This will help shore up our foreign exchange reserves,” he said in a tweet.

The stockpile decreased by $366 million in the week ended May 27 to stand at $9.72 billion, the State Bank of Pakistan said in a statement on its website earlier. That’s roughly a 50 percent drop from August and enough to pay for less than two months of imports.

The shortage of dollars could worsen as the nation forecasts its trade deficit will widen to a record $45 billion in the year ending June 30. The government has raised fuel and electricity prices, a key condition to unlock the remaining $3 billion of an existing loan by the multilateral lender. In addition to raising fuel prices, Pakistan will need to make further fiscal adjustments to narrow the budget deficit for Financial Year 222022-2023 to secure the IMF loan.

This will likely entail measures to boost tax collection and to reduce subsidies and capital expenditure. According to the Pakistani government, China has approved “RMB 15 billion syndicate loan facility from China Development Bank, Industrial and Commercial Bank of China and Bank of China, China Development Bank in capacity of agent bank to the syndicated loan facility from consortium of Chinese banks i.e. China Development Bank, Industrial and Commercial Bank of China and Bank of China has granted to extend RMB 15 billion facility ($2,4000 million) for a three years period at six month SHIBOR+1.50 percent margin.”

This facility was earlier extended in March 2019 which matured on March 24, 2022. The Chinese side has reduced the margin by one percent as compared with the previous facility.

The federal cabinet has already granted its necessary approval for obtaining a loan facility from China at one percent margin for the period of next three years.

The federal cabinet has granted the approval through a circulation of summary to obtain the loan facility at one percent margin from China for a three years period under an agreement signed by the former Pakistan Tehrik-e-Insaf-led government in year 2019.

Pakistan has been to the IMF 22 times in the past seeking a bailout. But real efforts at reform have been missing, which is why they keep going back. Pakistan's foreign currency reserves are currently depleting. They have halved in less than a year. And the country is in dire need of $36 billion in foreign financing in the next fiscal year that starts now, in June.

The financial support from China is expected to revive Pakistan’s economy to some extent before the IMF funds arrive. This is one of the many times, Beijing has stood by Islamabad.