Saudi oil facility to Pakistan amid soaring prices
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As global oil prices soar, Pakistan is seeking assistance from Saudi Arabia to the tune of $1.2 billion in the form of petroleum supplies on deferred payments. The Pak-Arab Refinery Limited and National Refinery Limited are planned to receive supplies of $100 million every month from Saudi Arabia for a period of 12 months in total.
While the first supply is expected by the end of March, little is known on the detailed term structure of this deal. Buy-now-pay-later schemes have often resulted in challenges to the balance of payment once the payment time arrives. This could be the case this time too as Pakistan embraces heightened political uncertainty in Islamabad, rising commodity prices in the wake of the Russia-Ukraine crisis, and a fluid situation in Afghanistan.
As this oil facility will demand Pakistan to pay back within a 12 month time period, it is hard to imagine whether the political and economic challenges described above will change soon, and if Pakistan will have better paying capacities. If this is not the case, then a year later the country will be left with no option but to request Saudi Arabia for a grace period, or acquire debt from other sources to pay back.
A strategic plan exists at the Ministry of Energy to overcome this persistent challenge that Pakistan faces i.e., every unanticipated hike in the international price of oil leads the Pakistani leadership to Riyadh for support. However, not much progress in operationalizing such a plan has been seen which could in turn enable Pakistan’s resilience to external oil price shocks. The private sector’s incentive to participate in new initiatives in the energy sector has also not favorably changed as mammoth circular debt is on an upward trajectory.
It is important to reimagine the way Pakistan engages and seeks support from the Saudi Development Fund (SDF)
Dr. Vaqar Ahmed
Learning from the experience gained under the energy portfolio of the China Pakistan Economic Corridor (CPEC), it is important to reimagine the way Pakistan engages and seeks support from the Saudi Development Fund (SDF). The fund has already pledged support for various projects which could favorably alter the energy mix and reduce reliance on imported supplies. These projects include Mohmand Dam, Shounter Hydropower project, Jagran-IV Hydropower project, Shagarthang Skardu project, Attaabad & Hunza project, and Gravity Flow Water Scheme Mansehra. These and other non-energy projects receiving support from SDF should not see the kind of bottlenecks witnessed in the case of some CPEC initiatives. This ultimately leads to a loss of interest by the creditor.
Saudi authorities have also suggested improving the local capacities required to conceive and mobilize large scale energy sector projects. Recently, due to weak project design and risk management, the cost of three power projects had to be revised by the provincial government of Khyber Pakhtunkhwa.
Some of the projects which SDF and other partners will sponsor are being managed by various Pakistani state-owned enterprises (SOEs) which are lacking in financial discipline. Without implementing the SOEs reform plan, it would be wrong to assume that these entities can be good managers of projects currently being conceived and implemented in the energy space. The SOE bill has been pending with the National Assembly Standing Committee on Finance since ages. The SOE triage plan, available from the finance division’s website begs consultation and has vast room for improvement.
The private sector is shying away from long term investments in the energy space. This is largely owed to the uncertainty of receivables (and uncertain schedule of return on invested sums); and frequent changes to tax, tariff, and the regulatory regime. For a very long time we have also heard about the merging of regulators in the energy space who currently continue to work in a fragmented manner – a key reason which makes it difficult for provincial energy authorities to woo investors.
Saudi Arabia and other friends of Pakistan continue to stress political stability in South Asia which could pave the way for normalizing trade relations with neighbors including India and Iran. Such a direction can then allow for transboundary trade in oil, power, and gas. However, even apart from political challenges, weak technical capacities in the region also continue to impair the progress on TAPI pipeline and CASA-1000 electricity projects.
As Pakistan’s reliance on imported oil supplies continues and international oil prices continue to see an upward trend, it is also important to emphasize the role of energy conservation policies. For a debt-ridden economy, every cent is precious if we wish to leave our future generations less burdened.
– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
