NationalVOLUME 17 ISSUE # 6

Saudi Arabia’s new package for Pakistan

The Pakistan rupee and the Pakistan Stock Exchange have started rebounding after the announcement of a $4.2b new financial package by Saudi Arabia. The financial assistance could not have come at a better time when Pakistan’s economy was facing serious challenges in the aftermath of rising commodity prices and the Covid-19 pandemic.

Under the package, Saudi Arabia will deposit $3b in the State Bank of Pakistan and provide $1.2 billion worth of oil supply on deferred payment, which will help address Pakistan’s balance of payment issues and energy problems. The Pakistan currency sank to a historic low of Rs175 against the US dollar. It has lost a whopping Rs23 against the US dollar since May 21, 2021. Since the start of the current fiscal year, the dollar gained 11.2pc or Rs17.73 against the local unit as it was trading at Rs157.54 on June 30, 2020. The depreciation added Rs2,750 billion to the country’s cumulative debt in May. The Pakistani rupee has become the worst-performing currency in Asia compared to its status as world’s best performer six months ago, as it hit a 13-month low against the US dollar in the interbank market due to a surge in demand for the greenback to pay for imports.

“The local currency has depreciated almost 10pc (or Rs14.71) in the past four months, becoming the “worst performer in Asia … (in) a basket of 13 currencies compiled by Bloomberg,” Bloomberg reported in September. The rupee had hit a 22-month high of Rs152.27 in May 2021 but since then it has been on a downturn. Earlier in March 2021, it emerged as the world’s best-performing currency, when it appreciated the most (4.09% to Rs153.55) against the US dollar from the opening level of January 1, 2021. Reserves with Pakistan’s central bank have declined for five consecutive weeks to $17.5 billion as of October 15. The reserves dropped by $1.7 billion during the week ending October 15.

Pakistan’s current account deficit reached $3.4 billion in the first quarter (July-September) of the current fiscal year in the wake of a spike in imports and higher international commodity prices. According to the State Bank of Pakistan (SBP), the country had recorded a current account surplus of $865 million in the corresponding quarter of the previous year. A strong rebound in economic activity and higher international commodity prices kept the current account deficit at a high level of $3.4 billion in Q1FY22, the SBP stated. The deficit widened on the back of soaring imports, which increased by 64pc year-on-year during the July-September quarter. However, exports also increased by 35.2pc during the period while remittances stood strong at $8 billion. SBP Governor Reza Baqir had told a press conference a few months ago that the deficit was sustainable as the exchange rate remained unaffected and the reserves were increasing. However, the exchange rate and reserves have destabilised in the last few months. “Few years earlier, Pakistan recorded a current account deficit of 6pc of GDP, however, in FY2021-22 it is expected to amount to 2-3pc of GDP which is sustainable,” he had said.

Overseas Pakistanis sent the highest-ever $8 billion remittances during the first quarter of the current fiscal year, registering a growth of 12.5pc over the same period last year. According to the central bank, workers’ remittances continued their strong momentum and remained above $2b since June 2020, with inflows of $2.7b in September. “This is the 7th consecutive month when inflows recorded around $2.7b on average,” said the SBP. In terms of growth, remittances increased by 17pc in September compared to the same month last year, while compared with August inflows it was 0.5pc higher.

According to the finance ministry, exports of goods and services will maintain their trend on average $3 billion a month and remittances $2.5 billion a month, taking into account the other secondary and primary income flows, the trade deficit and current account would remain in sustainable range. Moreover, the SBP is proactively taking measures to curb non-essential and luxury imports and other foreign exchange regulatory measures for the sustainability of the external sector. Pakistan’s “economy is expected to continue recovering in the fiscal year 2021-22, with real GDP projected to rise by 4pc,” according to the Asian Development Bank. It said that the outlook for agriculture was encouraging in view of the government’s ambitious Agriculture Transformation Plan. Growth in the industry is forecast to improve in FY22, driven by fiscal incentives announced in the FY22 budget, a substantial rise in the budgeted development spending and strong private consumption underpinned by adequate agricultural harvests, strong remittance inflow and pickup in earnings as social restrictions are reduced and most economic activity resumes. Enhanced growth in agriculture and industry and expected improvement in domestic demand are projected to boost growth in services, strengthening their contribution to the overall growth in FY22, it noted.

It is hoped the financial assistance from Saudi Arabia will ease pressure on the Pakistan currency against the dollar. Experts say the smuggling of dollars to Afghanistan has been the real cause of its increased demand in Pakistan. It has not only increased the country’s external debt but also inflation, which is badly hurting the common people. It is hoped the rupee will stabilise soon. However, the government will have to make a serious effort to control prices. Rates of food, especially cooking oil, sugar, flour, have skyrocketed in the country and the government will have to subsidise them to provide some relief to people.