The United States on Thursday once again sought preferred creditor status for its Export-Import Bank (Exim), which is looking to lend approximately $1 billion to Pakistan’s Reko Diq gold and copper mining project. However, Islamabad remains hesitant to grant such special status to a sovereign financial institution.
The issue was raised during a meeting between US Ambassador to Pakistan Donald Blome and Finance Minister Muhammad Aurangzeb. According to government officials, Blome discussed the matter with Aurangzeb at the Finance Division. The finance minister assured the US envoy that Pakistan was reviewing the request, officials added. This is not the first time the US ambassador has raised the issue of preferred creditor status in recent months.
The meeting between the US envoy and Pakistan’s finance minister occurred just two days before Aurangzeb’s scheduled departure to Washington, where he is set to attend the annual meetings of the International Monetary Fund (IMF) and the World Bank. During his trip, the finance minister is also expected to meet with junior officials from the US State Department, US Treasury, and the US Department of Energy.
The Exim Bank of the United States, a sovereign export credit agency of the US government, has shown keen interest in financing the Reko Diq project, proposing a loan ranging from $1 billion to $1.5 billion. However, the Biden administration is seeking preferred creditor status due to the project’s overall high credit risk.
While the updated feasibility study for Reko Diq is still pending, the project’s total cost is estimated to be between $6 billion and $6.5 billion, with approximately $3.2 billion needed for debt financing. According to a handout from the finance ministry following the meeting, “matters of mutual interest and bilateral cooperation were discussed.”
Pakistani authorities remain cautious about extending preferred creditor status to a bilateral lender as doing so might prompt China and other nations to demand the same treatment. The authorities were of the view that preferred creditor status was only meant for multilateral lenders like the World Bank.
In addition to the US Exim Bank, other major foreign lenders have expressed interest in financing the Reko Diq project. The World Bank’s International Finance Corporation is considering a $650 million loan, while the Asian Development Bank is interested in providing $400 million and the Islamic Development Bank is looking to provide about $100 million. Other countries, including Canada offering $500 million, Japan considering $500 million, Germany looking at giving $300 million, South Korea considering $400 million, and Australia looking at about $200 million, have also shown willingness to offer significant financial support for the project.
The debt financing offers have exceeded requirements due to the project’s immense potential. The US Exim Bank’s loan would primarily be used for procuring earth-moving machinery for the mining operation.
The Reko Diq project is currently owned 50% by Barrick Gold, 25% by three federal government entities, and 25% by the provincial government of Balochistan. Barrick Gold is in the process of updating the project’s feasibility studies, which are expected to be completed by December 2024. The first phase of production is anticipated by 2028, and the mine is projected to have a lifespan of at least 40 years, with a combined processing capacity of 80 million tonnes per annum.
Saudi Arabia has also expressed interest in the project, offering to purchase a 15% stake and provide a $150 million grant to develop infrastructure around the mining area. However, Pakistan has not yet accepted this offer, given the high potential of the project and the expected rise in global gold and copper prices.
Once commercial operations begin at Reko Diq, the government hopes to develop adjacent mining blocks with joint investments from Reko Diq, Saudi Arabia, the Balochistan government, and the federal government.
During the meeting, Aurangzeb briefed Blome on Pakistan’s efforts to implement “broad-based reforms in taxation, energy, and state-owned enterprises (SOEs)”. The finance minister reiterated the government’s commitment to raising the country’s tax-to-GDP ratio to 13.5% by plugging loopholes and bringing untaxed sectors into the fold.
Despite these pledges, the government has struggled to tax traders effectively. While the IMF set a target to collect Rs10 billion from traders in the first quarter of the fiscal year, the government managed to collect only Rs1 million. Meanwhile, salaried individuals bore the brunt, paying Rs111 billion in taxes over the last three months56% higher than the same period last year.
Aurangzeb also highlighted the government’s transformation plan for the Federal Board of Revenue (FBR), which includes bringing in experts on the Board of PRAL, the FBR’s IT arm, to improve tax collection efforts.
While the finance minister acknowledged that macroeconomic reforms were still a “work in progress,” he pointed to pressing issues such as climate change and child stunting, which threaten to exacerbate inequality and disrupt economic growth in Pakistan over the long term, said the finance ministry.
Blome appreciated Pakistan’s efforts to stabilise its macroeconomic environment and commended the government for undertaking challenging and bold reforms, particularly in the taxation and energy sectors, according to a statement from the finance ministry.
