Saudi Arabia has lent $1bn to Pakistan to help boost its liquid foreign currency reserves, giving Islamabad some breathing space during protracted bailout discussions with the IMF. The bilateral relations between the Islamic Republic of Pakistan and the Kingdom of Saudi Arabia are historically…
Saudi Arabia has lent $1bn to Pakistan to help boost its liquid foreign currency reserves, giving Islamabad some breathing space during protracted bailout discussions with the IMF.
Background
The bilateral relations between the Islamic Republic of Pakistan and the Kingdom of Saudi Arabia are historically close and extremely friendly, frequently described by analysts as constituting a special relationship.
Saudi Arabia and Pakistan are leading members of the Organisation of Islamic Cooperation (OIC). Saudi Arabia has also provided extensive religious and educational aid to Pakistan, is a major contributor to the construction of mosques and madrassas (religious schools) across Pakistan, including the Faisal Mosque in Islamabad, named after King Faisal of Saudi Arabia. Riyadh is also the largest supplier of oil to Pakistan.
Saudi Arabia is often seen offering its economic resources and the promise of investment in return for military and security cooperation from Pakistan. The partnership with Pakistan satisfies the Saudi historic quest for a close non-Arab ally to maintain its hegemony in the Arab world and deal with its own internal security challenges.
Analysis
Saudi Arabia has extended a loan of $1bn to Pakistan to help boost its liquid foreign currency reserves, giving Islamabad some breathing space during protracted bailout discussions with the IMF.
The Saudi assistance is part of a $6bn package promised last month. Half of the Saudi package will go towards meeting payments for Saudi oil shipments to Pakistan during the financial year to June 2019 while the other half is meant to boost Pakistan’s depleting foreign currency reserves. Abid Qamar, a spokesman for the State Bank of Pakistan, told the Financial Times the remaining $2bn promised by Saudi Arabia would be given over the next two months.
The Saudi assistance came on a day when discussions between a visiting IMF mission and Pakistani officials concluded without agreement on a new loan programme. The discussions will resume in mid-January, a senior finance ministry official said.
Pakistani officials have said that the government is seeking at least $7bn from the IMF to rebuild confidence in its economy, which faces a potential balance of payments crisis. Pakistan’s reserves are expected to rise to approximately $8.4bn or equivalent to about eight weeks of imports as a result of the $1bn loan announced by the central bank on Tuesday.
The senior finance ministry official said Pakistan and the IMF remained apart on matters such as the fund’s demand for a devaluation of the rupee and full disclosure of terms of Chinese loans worth more than $60bn. The loans, made under the China Pakistan Economic Corridor, are a centrepiece of Chinese president Xi Jinping’s Belt and Road initiative.
Pakistani officials were alarmed by comments in July from US secretary of state Mike Pompeo who warned against any IMF bailout to Pakistan on the grounds that proceeds would be channelled to China via CPEC-related payments.
Analysts said the Saudi assistance, along with expected loans from China, would buy more time for Pakistan’s IMF negotiations. Pakistan would eventually need an IMF programme to work as a stamp of approval for the country’s economic policies. Only a secured IMF program will unlock funds from lenders like other multilateral and the international bond markets.
An IMF statement late on Tuesday said: “There has been broad agreement on the need for a comprehensive agenda of reforms and policy actions.” The fund added that dialogue with Pakistan would continue in the coming weeks.
Assessment
Our assessment is that the close relation with Riyadh has enabled Pakistan to stay afloat until the IMF can sanction a full assistance program. We believe that Islamabad will have to make a commitment to drastic reforms if it needs to solve its ongoing balance of payment crisis.
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