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$6bn bailout package is a big breather

Updated October 29, 2018

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Illustration by Soonhal Khan
Illustration by Soonhal Khan

The Kingdom of Saudi Arabia has pledged to meet half of the $12 billion financing gap that Pakistan faces for the current fiscal year. Coming again to Islamabad’s rescue — third in two decades — Riyadh promised to place a $3bn deposit with the State Bank of Pakistan (SBP) and provide up to $3bn worth of oil supplies on credit — both for a year.

That is a big breather. Coupled with even half of such support from China, it will significantly reduce Pakistan’s external account gap and help restore market confidence. International lending partners are coming on board with foreign exchange reserves rebuilding to a respectable level, which will qualify the country for programme loans. Prime Minister Imran Khan’s first visit to China comes later this week.

Finance Minister Asad Umar expects that Mr Khan’s visit to Beijing will clear things as to how much support is required from the International Monetary Fund (IMF) for which talks are scheduled to begin on Nov 7. This apparently revives the original plan of a minimal balance-of-payments support from the Fund — around $3-4bn instead of the earlier contemplation of a double-digit bailout package.

The falling gap tempted Prime Minister Khan to boast last week that the country might not need an IMF programme.

Linking Gwadar with Oman through an under-the-sea tunnel or bridge can be a major future project involving billions of dollars, given Riyadh’s desire to diversify trade routes

The finance minister, however, believes that more than the amount of the loan, the IMF engagement is important to access the international capital market for bonds, enable flows from the Asian Infrastructure Investment Bank, World Bank and Asian Development Bank and encourage foreign direct investment.

Saudi Arabia had also 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.

Political and parliamentary noise over the possible engagement of Pakistani troops in the Middle East military crisis practically torpedoed an under-discussion package of around $12bn involving about 100,000 barrels of crude oil per day and about 15,000 tonnes of furnace oil per day for three years. The breathing space then was planned for a heavy spending on technology for reducing power-sector losses, which remained a pipedream.

This time, the government expects $3bn in SBP accounts within two weeks as a ‘safe deposit’ repayable in a year with a negligible return. The oil facility worth up to $3bn will become payable after 12 months. This facility will be available for three years and will be reviewed thereafter. Expectations are again similar as Riyadh faces pressure on the borders and international criticism. Both Pakistan and Saudi Arabia are trying together to achieve a shift in strategic alignments, seemingly away from US good books.

Vision 2030 of the Saudi government has plans for back-and-forth infrastructure links that it calls interconnection of three continents. A proposed refinery at Gwadar for which a formal memorandum of understanding is expected shortly besides an oil storage facility of two to three million tonnes is part of its plan to secure its export supplies. Pakistan has already promised a 16 per cent return on investment in the oil refinery for which a refining policy was approved in the last few days of the PML-N government.

Saudi Arabia has around 8-10 million barrels per dayof oil exports and a storage facility outside the strategic Strait of Hormuz will help secure supplies to the eastern clientele because Russia may have better prospects to grab western markets amidst any adverse conditions in the Middle East.

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.

Pakistan has been seeking a long-term arrangement for oil supplies on delayed payments as one of the most crucial avenues for balance-of-payments support. Out of its total crude oil imports of about 350,000 barrels per day, Pakistan normally imports about 110,000 barrels per day from Saudi Arabia.

Pakistan’s oil import bill amounted to $14.5bn in 2017-18. It can go up to $18bn this year with higher prices and increased consumption.

Finance Minister Umar, however, disagrees with the perception that Saudis made any sort of demands. But he left a hint between the lines, saying “It is a people-to-people connection. They will stand by Pakistan’s side during our time of need and they know we stand by them when they need [us].” The fact remains that the bilateral connection has always been between the civil and military leaderships of the two countries.

Published in Dawn, The Business and Finance Weekly, October 29th, 2018