China has agreed to loan Pakistan $700m (£580m) to help it weather its worst economic crisis in a generation, in a development that will intensify concern among western countries about cash-strapped Islamabad’s debt burden to Beijing.

The loan comes on top of $30bn (£25bn) that Pakistan already owes China and Chinese commercial banks. Securing the financing will help to unlock bailout cash from the International Monetary Fund (IMF).

The news of the loan from ​​the state-owned China Development Bank came the day after Pakistan’s National Assembly unanimously passed a money bill to increase tax revenues. The IMF has said Pakistan must comply with certain requirements, such as raising taxes and securing external funding, if it is to release $1.1bn (£900m) of bailout funds, part of a $6bn (£5bn) package agreed in 2019.

Pakistan’s foreign debts amount to about $100bn (£83bn), meaning that the share owed to China is just under one-third. But China is Pakistan’s biggest single creditor and tends to charge relatively high interest rates compared with multilateral lenders.

Last year the country was hit by devastating floods that cost an estimated $30bn in damage and lost output. Since then the war in Ukraine, which has sent food and fuel prices soaring, as well as years of domestic economic mismanagement, have crippled Pakistan’s economy. As of 10 February foreign reserves were down to just over $3bn (£2.5bn), barely enough to cover three weeks of imports.

In the week ending 16 February, inflation for core goods, such as cooking oil, vegetables and fuel, hit 38.4%.

Pakistan’s economy is on a “suicidal path”, says Zubair Khan, an economist and former IMF official. “Our government is pursuing the wrong policies and the IMF programme is aggravating the situation.” He believes the increase in taxes requested by the IMF will worsen Pakistan’s balance of payments crisis.