Saudi Arabia is an all-weather friend and has once again come to Pakistan’s rescue. It has agreed to deposit 3 billion dollars for one year as balance of payment support, extended a 3 billion dollar deferred payment facility for three years and confirmed interest in setting up an oil refinery in Pakistan. Saudi Arabia has agreed to reduce visa fees for Pakistani workers as well.
The deferred oil facility up to 3 billion dollars implies that the import bill would be that much less each year for the next three years. During fiscal year July-June 2017-18 Pakistan imported oil worth approximately 14 billion dollars, which reflected a rise of over 60 percent with higher quantity imports estimated at around 29 percent while the rest was attributed to a rise in the international price of oil.
It may be recalled here that Saudi Arabia accounted for around 3 billion dollars of imports last year or around a quarter of our oil import bill was sourced to the kingdom. The agreement therefore indicates that Saudi Arabia would allow almost the entire oil import bill, at current price of oil, to be deferred, a positive decision which in turn would, no doubt, reduce the pressure on our foreign exchange reserves. The decision to allow 3 billion dollar direct injection for balance of payment support would further reduce the pressure on our scarce foreign exchange reserves that were recently estimated by the State Bank of Pakistan at an appallingly low 8 billion dollars – less than two months of imports.
It may be recalled here that Saudi Arabia had provided financial support to Pakistan soon after the latter conducted nuclear tests in May 1998, suffered an economic meltdown and faced US-led international economic sanctions. Starting with oil supplies worth $1bn on deferred payments, Pakistan received $3.5bn support between 1998 and 2002.A major part of the deferred oil facility was converted into a grant but then discontinued when the leadership at the time volunteered its soft terms to the IMF to the Kingdom’s displeasure. Another “$1.5bn gift” from Riyadh was deposited to the so-called Pakistan Development Fund in 2014 when the PML-N government was struggling to overcome yet another economic crisis. The funds were subsequently shown as the government of Pakistan’s equity in two major LNG-based power projects in Punjab.
As we know, Saudi Arabia is also the largest source of remittance inflows, though they declined to 308 million dollars last month compared to 465.6 million dollars the month before. However, July-September remittances from Saudi Arabia have been estimated at 1.26 billion dollars compared to 1.2 billion dollars in the comparable period of the year before. Pakistan’s immediate foreign exchange needs were conservatively estimated at around 12 billion dollars; thus the recent visit by Prime Minister Imran Khan to Saudi Arabia has halved this requirement, i.e., by 6 billion dollars. In this context, it is important to remember that the Saudi assistance is not a grant and has to be repaid and is limited to this year – 3 billion dollars after one year; and 3 billion dollars in deferred facility would have to be cleared before a fresh 3 billion dollar deferred oil facility may be used.
It is expected that the UAE may also follow suit, being a major source of oil imports and remittance inflows for Pakistan. China with more than 3 trillion dollar foreign exchange reserves may opt to meet the remaining shortfall in our foreign exchange reserves subsequent to the warning by US Secretary of State Mike Pompeo that the US would not support IMF extending a bailout package to Pakistan.
There is another dimension to the ever warm Pak-Saudi ties. Linking Gwadar with Oman through an under-the-sea tunnel or bridge could be a major future project involving billions of dollars, given Riyadh’s desire to diversify trade routes, including for oil supplies, because of its tension with Qatar and Iran. It has been considering two options — a bridge or tunnel of about 40km to link Gwadar with Muscat and Oman at the mouth of the Strait of Hormuz and connecting its industrial city of Jazan with Eritrea’s Massawa region through a 440km-long tunnel across the Red Sea. The land route between Muscat and Jazan port is around 2,200km long at present.
Despite critics’ remarks, experts are agreed that Pakistan had to borrow to pay off massive loans incurred during the past five years and shore up its dangerously low foreign exchange reserves. That the government has managed to do so at minimal cost without any prohibitive conditionalities as well as in terms of the rate of interest charged on the loans goes to its credit. However, the government would need to formulate and implement economic policies that are politically extremely challenging as well as economically sound. Going forward, PTI’s economic team should formulate short and long term policies to make the best of the Saudi largesse, especially through projects and plans to jump-start the economy and bring relief to the common man. PTI government has done well so far but it needs to do better in the future.