SAUDI oil on deferred payment — the ‘Saudi Oil Facility’ — is expected to deliver another lifeline to Pakistan currently battling the worst of the budgetary woes.

The past experience shows that this deferred payment facility is assumed to be a “grant” from Saudi Arabia to cash-strapped Pakistan. The common perception is that it may not be different this time also. As reports go, Saudis will soon extend a $5.9 billion oil facility. The modalities are being worked out.

A Western diplomat familiar with Saudi ties to Pakistan was quoted as saying that the Saudis in 1998 began supplying crude oil under a deferred payment facility after Pakistan carried out its maiden nuclear tests and came under international economic sanctions.

“After three years of deferred payments arrangements, the Saudis practically “wrote off” the payments. It would be interesting to see if there is going to be a “write-off” in future of the deferred payments now under discussion,” the diplomat was quoted as saying.

The Saudis had extended this facility in the immediate aftermath of the nuclear tests, while the western world had imposed sanctions against Pakistan. Saudi Arabia and other Gulf friends helped Pakistan remain afloat, rescuing it from financial distress. Saudi Arabia extended the facility of deferred payment on its crude sales of 80,000 barrels per day. This facility continued for full two years but was reduced to half the quantity – 40,000bpd – for another year.

Though the payment was technically deferred, Pakistan has practically not paid this amount to Saudi Arabia as yet. Many in Pakistan and in some western capitals felt this may have been converted into a grant. However, some analysts caution against this line of thinking advising that the payments still remain outstanding in books.

The recent past can be a guide to deferred payment. During the almost decade long Iraq–Iran war (1980–88), the Gulf Arab states were siding with the regime in Baghdad under Saddam. In order to help Iraq overcome financial strain of the long war, oil-rich Gulf Arab states provided large assistance in both cash and kind to Iraq.

Once the war came to an end, things started to change somewhat. It was at this juncture that the reality dawned upon Saddam Hussain that the entire sum that was provided during the Iran-Iraq war by its Arab neighbours and which was then perceived as a grant by them was in fact a loan, repayable to the respective donors.

And thus when Kuwait asked the Iraqi government to pay back all that accrued to it, Iraqis simply refused, insisting it was a grant and not a loan. Saudi Arabia attempted reconciliation between the two sides but failed.

And even now, there is a lot US and Iraqi pressure on Saudi Arabia and other Gulf Arab States to write off the debts that were provided to Iraq under Saddam Hussain and which Baghdad had always perceived as grant.

However, the Saudis and other Gulf Arab states still seem reluctant to oblige. They have been weathering that the pressure, refusing to give in.

And it is only in recent weeks that the UAE government finally announced writing off the debts during the Saddam rule. Others are yet to follow.

Some analysts also believe that Opec members are committed to the international community not to provide oil on non-commercial terms. That, perhaps, explains the ambiguity on the deferred payment facility.

While Saudis may not press for repayments for whatever reasons, the deferred payment is no grant. The policy planners in Islamabad need to understand and comprehend fully its consequences too.