Islamabad – August 2025
Pakistan’s efforts to secure breathing space for its fragile economy have run into a familiar challenge: the country’s growing dependence on Chinese financing and the increasingly strict terms attached to it.
What began in May 2024 as a request for fresh inflows of about US$600 million, split between the Bank of China and the Industrial and Commercial Bank of China, soon highlighted the changing mood in Beijing. Instead of soft financing, Pakistan faced high interest rates, rigid repayment schedules, and strict oversight. Negotiations became drawn-out, leaving policymakers in Islamabad under pressure to find a compromise that would protect reserves without locking the economy deeper into debt.
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Why China Became Cautious
China has traditionally been one of Pakistan’s most reliable partners, often stepping in when Western lenders hesitated to do so. But Beijing’s approach has shifted. Global uncertainty, mounting financial stress in developing countries, and their own exposure through the Belt and Road Initiative (BRI) have led Chinese banks to be more cautious.
Rather than providing quick, flexible credit, Beijing now insists on commercial-style loans, complete with fixed repayment timetables and higher interest rates. Analysts say this strategy reflects China’s desire to ensure its funds are returned on time, even if it means borrower nations like Pakistan face greater strain.
What has Happened Since May 2024
Since those stalled talks, a series of debt developments has reshaped the picture:
- Rescheduling Request: In early 2025, Islamabad formally requested that the Export-Import (Exim) Bank of China reschedule approximately US$3.4 billion in maturing debt. The request sought an extension until September 2027, though Pakistan would continue to service the interest in the meantime.
- Short-Term Extension: Around the same period, China agreed to extend a US$2 billion loan for an additional year, sparing Pakistan from immediate repayment.
- Commercial Loan Rollovers: In June 2025, Beijing rolled over another US$3.4 billion in commercial loans. Part of this amount had already been parked with the State Bank of Pakistan, while the rest was refinanced after Islamabad made repayments.
- Renminbi-Based Facility: Instead of borrowing entirely in U.S. dollars, Pakistan also secured a US$3.7 billion syndicated loan in renminbi, with a three-year term arranged by several Chinese banks, including ICBC and the Bank of China. This shift to RMB financing was seen as a move to reduce pressure on dollar reserves, though repayment terms remain under negotiation.
Collectively, these measures helped Pakistan build up its reserves above US$14 billion by June 2025, a level required by the International Monetary Fund (IMF) under its stabilization program. But the achievement came at a price: more rollovers, heavier interest obligations, and little long-term relief.
The Burden of Dependence
Critics argue that Islamabad’s repeated reliance on Chinese loans underscores a deeper weakness in its economic planning. While the inflows provide temporary stability, they also limit policy flexibility. Every extension or rollover buys time, but also extends the repayment burden.
Unlike earlier concessional loans tied to development projects, today’s deals are more commercial in nature. Interest rates are higher, repayment schedules leave little room for slippage, and restructuring options are narrow. This means the government must divert scarce resources to service debt, often at the expense of public spending or development programs.
Wider Implications for Pakistan
- Fiscal Strain
Meeting repayment schedules while covering interest on rescheduled loans forces the government to either borrow more or raise additional revenue. Both options risk slowing the economy, which is already under stress from inflation and weak growth. - IMF Concerns
Although Pakistan has met IMF reserve targets with Chinese help, multilateral lenders remain wary. The IMF prefers transparent and sustainable financing, whereas bilateral rollovers, especially when details are kept confidential, raise questions about long-term viability. - Political Sensitivity
Domestically, reliance on Chinese credit often sparks debate. Supporters argue that Beijing is Pakistan’s only dependable partner. Critics counter that the terms resemble a “debt trap,” tying Islamabad too closely to one lender. - Sovereign Credit Risks
Over-dependence on rollovers rather than fresh inflows may dent international investor confidence. While Pakistan has avoided outright default, its creditworthiness remains fragile.
The Chinese Perspective
From Beijing’s viewpoint, the caution is understandable. Many BRI partner countries have struggled to repay loans, forcing China to write off or restructure billions of dollars in debt. By demanding higher interest rates and tighter schedules, Chinese banks seek to avoid repeating those experiences.
In Pakistan’s case, the stakes are particularly high. With projects under the China-Pakistan Economic Corridor (CPEC) already running into delays and criticism, Beijing aims to prevent its financial exposure from spiraling out of control.
For Islamabad, the challenge is clear: balance the urgent need for external financing with the long-term sustainability of debt. Negotiating softer terms with China remains difficult, but diversifying funding sources through the IMF, Gulf allies, and global capital markets may provide breathing space.
At the same time, structural reforms at home, such as expanding the tax base, improving energy sector efficiency, and curbing unnecessary imports, are critical. Without them, Pakistan risks falling into a cycle where each loan repayment requires yet another loan to cover it.
Since May 2024, the nature of Pakistan’s financial ties with China has shifted further toward commercial rigidity. While Beijing has helped by rolling over billions and offering short-term relief, it has done so on its own terms, demanding higher interest and fixed repayment schedules.
For Pakistan, this creates a delicate balancing act. The government can continue to meet IMF conditions and maintain reserve stability for now, but at the expense of increasing debt dependence. Whether this strategy remains viable will depend on Islamabad’s ability to reform its economy, broaden its revenue base, and ultimately reduce its reliance on borrowed funds.
Until then, Pakistan will continue to walk a financial tightrope, with China holding a large share of the safety net, as well as most of the ropes.
The loan aimed to increase Pakistan’s cash reserves during a recession. However, the strict requirements have sparked questions about whether the nation can satisfy them without further taxing its economy.
“To secure this crucial loan, we have been in discussions with our Chinese counterparts,” a senior Ministry of Finance official who wished to remain nameless said. Regrettably, the conditions are rather complex, and we are making every effort to find a compromise that benefits all parties.
According to experts, the stringent loan requirements reflect China’s cautious lending policy, which is shaped by concerns about the state of the world economy and past instances of financial difficulty among borrowing countries.
The conclusion of these talks may significantly affect Pakistan’s relationship with China and its financial stability. The world community is closely monitoring Pakistan as it walks this financial tightrope, and the government continues to debate the parameters.
My name is Farhad Dawar and I am graduate of the Institute of Media and Communication Studies Bahaddin Zakariya University Multan Pakistan. I’m passionate about journalism and media, and I believe in journalism of courage, uncovering the truth, and shaping the future.
- Farhad Dawarhttps://dawartimes.com/author/admin/
- Farhad Dawarhttps://dawartimes.com/author/admin/
- Farhad Dawarhttps://dawartimes.com/author/admin/
- Farhad Dawarhttps://dawartimes.com/author/admin/
