In 2023, Pakistan should be more imaginative in its economic relations with Saudi Arabia
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Pakistan is once again looking towards Saudi Arabia to avert challenges emanating from low foreign exchange reserves, reduced inflows to finance even the most necessary imports and raw materials, and to honor maturing debts. On several occasions during 2022 both PTI and the PML-N leadership looked towards Riyadh for financial help. During the summer of 2022, Riyadh’s nod to support Pakistan’s forex reserves was a condition to successfully conclude the seventh and eighth review of the International Monetary Fund (IMF) which ultimately led to the release of its tranche and the unlocking of funds from other multilateral bodies.
During late 2021, the Saudi Fund for Development (SFD) had also placed a deposit of USD 3 billion with Pakistan’s central bank. This deposit supported dwindling foreign currency reserves and contributed towards stabilizing the value of the PKR for a limited time period. By November 2022, Pakistan’s dismal macroeconomic fundamentals hadn’t changed much, prompting the new leadership in Islamabad to request extending the term of the deposit which was later approved by SFD.
This support may not be enough to alleviate the pressures on the PKR and import sector. The Finance Minister has stated that further help from Saudi Arabia is being sought which may double the current deferred oil payment facility to $2.4 billion. Media reports have already informed that during the Army Chief’s upcoming visit to Riyadh, a fresh request for new loans is a likely possibility. Without this it could become difficult for Islamabad to honor debt repayments which are due during the January-March period of 2023.
While borrowing from Saudi Arabia is imminent, it is important to note that Pakistan has been slow to engage Riyadh in long term investment transactions. Saudi interest in Pakistan’s refining and petrochemical sector was formalized through an MoU signed between the two governments in 2019. Since then, there hasn’t been much progress. As per the latest official news, while the engagement continues, Islamabad hasn’t yet provided the kind of policy incentives for the proposed refinery in the Hub area of Balochistan which could help Saudi Aramco decide in favour of investing. This continues to be a missed opportunity for Pakistan’s poorest province where even domestic investors are not willing to take a risk.
While the above-mentioned cooperation between state-owned firms from both sides is important, it is equally important to invite the Saudi private sector in big numbers. Recent data shows that during July – October 2022, foreign investment from Saudi Arabia merely stood at $0.9 million. Even the dividend on past Saudi investments was greater than this number i.e., $4.1 million during the same period. Pakistani firms have traditional linkages with Saudi counterparts which helps explain that despite uncertain energy supplies and rising costs, Pakistani exports to Saudi Arabia increased by almost 16 percent during July-October 2022 (compared to the same months of 2021).
While borrowing from Saudi Arabia is imminent, it is important to note that Pakistan has been slow to engage Riyadh in long term investment transactions.
Dr. Vaqar Ahmed
I would like to argue that Pakistan will need to be more imaginative in its longer-term economic relations with Saudi Arabia. A ‘lender fatigue’ is reached when the creditor decides that they no longer need your business. They also notice over time that repayment capacities are declining and under an unanticipated default principal amount could be lost.
Pakistan is already witnessing a lender fatigue in the post-floods milieu where rich countries have offered their sympathies with commitments towards relief, rehabilitation, and reconstruction. The fate of the Geneva conference where donors are invited and Pakistan will disseminate its estimates of flood loss could result in international embarrassment if lenders are not convinced about longer term repayment capacity.
One way to overcome the above-mentioned scenario is to engage friends of Pakistan, particularly Saudi Arabia into innovative climate, clean energy, and green transport initiatives which also sync with promises both countries have recently made at Sharm el-Sheikh Climate Change Conference (COP 27). Despite large oil reserves, Saudi Arabia is fast becoming a global leader in renewable energy. During September this year, Saudi Arabia launched five fresh projects aimed at producing power using renewable energy and having a capacity of 3,300 megawatts.
Pakistan’s close ties with Saudi Arabia should pave the way for a free trade pact between the former and GCC economies. This agenda has been pending since 2007. Pakistan has a lot to offer in both the goods and services sector and its private sector can immensely gain from more economical imports from the gulf. The timing for such trade negotiations is apt. Riyadh is already reorienting its foreign relations and the December visit of Chinese President to Saudi Arabia could imply that in the future, Pakistan could use China-Saudi strategic alignment in its favour.
Finally, Pakistan must pay heed to the feedback from a delegation of Saudi businesses who recently visited Islamabad. First, that facilitating Saudi firms should not wait for a Prime Minister’s directive. This is reflective of a heavy state footprint in markets. Second, tax policy faced by foreign investors should not see frequent changes. Finally, bring down the regulatory costs – a fragmented business climate has resulted in six different tax and regulatory regimes across six different federating units.
— Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed
