Saudi Arabia’s financial assistance is a big win for Pakistan’s economy and politics

Saudi Arabia’s financial assistance is a big win for Pakistan’s economy and politics

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Earlier this week, Pakistan received $2 billion in financial assistance from Saudi Arabia, which will boost the country's foreign exchange reserves. The deposit comes one day ahead of the expected final approval of a $3 billion standby arrangement for Pakistan by the International Monetary Fund (IMF).

Most financial analysts believe that Saudi Arabia had pledged the financial assistance in April, but had withheld depositing the money with the central bank of Pakistan until it was certain that the IMF bailout would be secured. The nine-month IMF arrangement will result in an initial disbursement of approximately $1.1 billion, with the remaining funds to be disbursed over time. In addition to the financial support from Saudi Arabia, the IMF agreement is expected to unlock further bilateral and multilateral financing. The Ministry of Finance anticipates that by the time the government's tenure ends in August this year, central bank reserves (and other financial arrangements with lenders) could be at a level enough to cover debts maturing until the end of fiscal year 2023-24.

The news of Saudi assistance has had a positive impact on Pakistan's economic landscape. Credit rating agency Fitch upgraded the country's sovereign rating. Investors in Pakistani stocks and bonds have also experienced some relief, with the country's sovereign dollar bonds rallying at higher levels following the announcement. Pakistan's bonds, particularly the shorter-dated ones, have witnessed a rally since the IMF announcement.

However, Pakistan must now undertake the promised reform agenda and fiscal discipline measures to fulfil its commitments to the IMF. There will be political costs which the current government should not avoid. The central bank has raised its policy rate to a record-high, a move that has placed additional strain on small and medium enterprises and ordinary citizens who are grappling with an all-time high inflation rate. The Pakistani rupee has been under pressure in recent months. Saudi assistance will over time help to stabilize the rupee. An improved forex outlook will also make it easier for businesses to import inputs, which could over time help to keep inflation in check. Price inflation is also expected to slow down in the next quarter but not by much unless supply side economic indicators exhibit significant improvement.

The $2 billion Saudi assistance to Pakistan is a significant signal to the entire region, and demonstrates to all that Islamabad has the support of a powerful ally.


Dr. Vaqar Ahmed

Government spokespersons have argued that Saudi assistance is a vote of confidence in Pakistan's future economic plans including the recently established Strategic Investment Facilitation Council (SIFC). Saudi authorities believe that Pakistan is committed to economic reform and that the country's economy is on the right track. This will help restore investor confidence, which could lead to increased foreign investment – a view which Finance Minister Dar has reiterated several times over the past 48 hours. 

In addition to economic benefits, Saudi assistance could also have some political benefits for certain quarters. The assistance is seen as a sign of Saudi Arabia's support for the current administration and Pakistan’s military, which could help to strengthen the government's position domestically. 

Saudi assistance could have implications for the upcoming elections in Pakistan. It could help to strengthen the position of the current party in power, the Pakistan Muslim League-Nawaz (PML-N), which has been facing criticism for its handling of the economy. Additionally, the assistance could help to improve the PML-N's image as a reliable partner for Saudi Arabia. The PDM as a coalition also gets to benefit from this.

In fact, Saudi assistance to Pakistan at this time is a significant signal to the entire region, and demonstrates that Islamabad has the support of a powerful ally. This could help to deter any potential aggressors from taking action against Pakistan on forums such as the Financial Action Task Force (FATF). Additionally, the assistance could help to improve confidence levels of Pakistan’s other partners, such as China, Qatar, and the UAE. Coincidently, the Saudi deposit has come at a time when the European Union has announced extending Pakistan’s GSP+ status. Businesses who export to Europe but cannot meet their import requirements can now see some relief as Saudi assistance could lead to further liberalization of the import regime in Pakistan. 

The party that wins the upcoming election in Pakistan will likely face pressure from Saudi Arabia (and other development partners) to continue the reforms that have been committed to under the IMF bailout. These reforms include raising taxes, reform of the energy sector and state-owned enterprises, keeping discretionary and un-targeted government spending to a minimum, and bringing more fiscal discipline in the budgets of provincial governments. Future Saudi support is likely to be conditional on the continuation of these reforms.

– 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​

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view