Saudi support and Pakistan’s economic outlook
Saudi Arabia has expressed a deep keenness in helping Pakistan come out of its current economic woes. In his most recent directive, Crown Prince Mohammed bin Salman has asked the authorities in his country to immediately study the prospects of increasing the quantum of Saudi investments in Pakistan.
Pakistan’s foreign exchange reserves remain under pressure due to the upcoming debt repayments and for this purpose, the crown prince has also directed the Saudi Fund for Development (SFD) to see if deposits to Pakistan’s Central Bank could be enhanced.
This announcement has a favorable sentimental value for the markets. Pakistan is trying to liberalize imports to meet the demand for essential items and exporting sector. Additionally, foreign investors also need to be assured that their future profit repatriation is not under threat. This announcement will also be one key element in giving the government some level of confidence when it engages with the International Monetary Fund (IMF) and bring the Extended Fund Facility (EFF) back on track. It is evident now that Pakistan will need another fund program after June and for this goal to materialize, short-term support from friendly countries is invaluable.
One of the less talked about Saudi support was in the form of response to recent floods in Pakistan. The Kingdom has the largest share in the Islamic Development Bank, which has committed US$4.2 billion to Pakistan for rehabilitation and reconstruction purposes.
The proceeds could take time to materialize before they are deployed for development purposes. However, there are a couple of issues that warrant attention.
In fact, it was only after Riyadh’s nod to support Pakistan’s forex reserves that led to the successful conclusion of the seventh and eighth reviews of the IMF – and enabled the release of tranche and unlocking of development funds from multilateral organizations.
Dr. Vaqar Ahmed
This is not the first time in the recent past that Pakistan is looking towards Saudi Arabia to avert challenges emanating from low reserves and maturing debts. Both Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) party and Shehbaz Sharif’s Pakistan Muslim League-Nawaz (PML-N) have looked towards Riyadh for financial help on several occasions during the past decade. In fact, it was only after Riyadh’s nod to support Pakistan’s forex reserves that led to the successful conclusion of the seventh and eighth reviews of the IMF – and enabled the release of tranche and unlocking of development funds from multilateral organizations.
Similarly, during the fall of 2021, SFD placed a deposit of US$ 3 billion with Pakistan’s central bank. Despite UAE’s institutions demanding their deposits back after maturity, Saudi funds remained in the system. After almost another 12 months, in the fall of 2022, Pakistan’s macroeconomic fundamentals hadn’t changed and Islamabad yet again requested an extension in the term of the deposit which was later approved by the SFD.
The bottom line here is that demand for import and upcoming debt repayments are so large that Pakistan may not be able to continuously rely on repeated requests to Riyadh for rollovers and additional deposits.
What is more advisable is to solicit the interest of the Saudi private sector for longer-term financial sustainability. After the previous visit of the crown prince to Pakistan, Islamabad was supposed to ensure that expressions of interest from the Saudi side should fast materialize. Saudi side had expressed deep interest in Pakistan’s refining and petrochemical sector. The promised policy incentives for the proposed refinery project haven’t been finalized which in turn prevents Saudi Armaco to decide in favor of mobilizing its initiatives here. This is a missed opportunity for the poorest province, Balochistan, where this refinery is supposed to be based.
I have argued in the past that unless (private) investor interest from the Kingdom is ensured, ‘lender fatigue’ is bound to happen as Saudis also notice over time how the repayment capacities in Pakistan have declined. This is not an attractive scenario for any government which is an aid provider. Foreign private investors, however, have a larger appetite for risk if their presence can be ensured for a longer time period with the security of profits and assets ensured.
Another important element in Pakistan’s relationship with the Kingdom is the access to oil on a deferred payment facility. Cooperation in the energy sector between both countries now needs to be seen in a much broader framework. Saudi Arabia is all set to become the largest player in the renewable energy space across the Middle East. Only in 2022, the country has initiated five renewable energy projects with a capacity of producing power up to 3,300 megawatts. This is only the tip of the iceberg given the Saudi Commitments at Sharm el-Sheikh Climate Change Conference (COP 27) towards green and clean energy.
Saudi Arabia’s intervention should also be requested to expedite a free trade pact between Pakistan and GCC – a draft of which is pending since 2007. Given Pakistan’s large volume of imports from GCC, this measure is bound to bring down the import costs faced by the local private sector, and at the same time, pay the way for custom-free exports by Pakistan.
- 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.