Saudi Arabia tells Pakistan: No more easy money
Saudi Arabia’s decision to refuse to provide any additional bailouts or interest-free loans to Pakistan has shocked the government in Islamabad and prompted the finance minister to complain that even friendly countries are unwilling to help Pakistan for its economic emergency.
Pakistan desperately needs a continued inflow of US dollars to avoid defaulting on nearly $80bn of international loan repayments over the next three and a half years. The country currently has only $3bn in foreign exchange reserves.
‘Saudi Arabia is now on a different course. They reset their relationship with other countries…’
– Kamal Alam, Atlantic Council
Pakistan is also locked in difficult negotiations with the International Monetary Fund (IMF) over its 13th bailout package since the 1980s.
If an agreement is not reached soon, it will become increasingly difficult for Pakistan to get international loans, as its credit rating has been downgraded to junk.
Analysts privy to recent developments told Middle East Eye that Saudi Arabia has conditioned fresh interest-bearing loans and investment on Pakistan to implement strict monetary and fiscal reforms along with significant deficit reduction its current accounts – conditions similar to those laid down by the IMF.
Umar Karim, an associate fellow at the King Faisal Center for Research and Islamic Studies, said the Pakistani authorities are in a state of turmoil.
“While earlier Saudi Arabia and other Gulf countries would bail Pakistan out of a phone call from the foreign minister or the prime minister, this time they are really being put through the mill,” Karim told MEE .
It is believed that on a recent trip, even Pakistan’s military chief could not convince Saudi Crown Prince Mohammed bin Salman to release emergency funding to the country.
Karim believes this sets a new precedent. “Pakistan’s military chiefs were a source of assurances to friendly countries before, but now many Pakistani civilian authorities are sending these leaflets away,” he said.
A new world order
At the World Economic Forum in Davos in January, the Saudi finance minister made the kingdom’s new policy very clear.
Mohammed al-Jadaan said: “We used to give direct grants and deposits with no strings attached and we are changing that. We are working with multilateral institutions to say that we need to see reforms.”
“We are taxing our people, we expect others to do the same, to put in their efforts. We want to help you but we also want you to do your part.”
‘There is also a huge trust deficit between the Pakistani government and the IMF’
– Khaqan Najeeb, former government adviser
Kamal Alam, a senior member at the Atlantic Council, said that the Pakistani authorities should have read the pattern.
“Saudi Arabia is now on a different course. They reset their relations with other countries and refused to give financial handouts to: Jordan, Morocco and even Egypt. However, Pakistan, which is far more passive than all the others, should have seen it coming,” Alam told MEE.
“Pakistan is being lured into a false sense of security”, said the analyst, “with a population of over 220 million and a comprehensive nuclear weapons program, too big for the world to let fail. This has led to complacency across successive governments and the country’s military leadership for easy loans or bailouts.”
Khaqan Najeeb, a former adviser to Pakistan’s Ministry of Finance, said that the Saudis want Pakistan to sign a contract with the IMF and only then will they see any loans or investment.
“The Pakistani government’s delay in implementing necessary monetary and fiscal policies, as demanded by the IMF, has hurt the economic situation,” Najeeb said.
“There is also a big trust deficit between the government and the IMF which is why the Fund is making sure that Pakistan implements these policies before it gets any additional funding or the important stamp of approval.”
Meanwhile, the inflation rate in Pakistan is set to hit 33 percent in the coming months and the country’s currency has devalued by nearly 65 percent in the past 12 months.
Almost six months ago, in order to stop the outflow of foreign exchange, the government of Pakistan stopped almost all imports, leading to a shortage of raw materials across the manufacturing sectors and the temporary shutdown of several car manufacturing plants and textile factories.
Najeeb argues that with high inflation, slow growth and high interest rates around the world, there is less money available for emerging markets such as Pakistan, and without the IMF’s “stamp of approval” even the friendly kingdoms of the Gulf still shy to invest in the country. .
“Friendly countries also want to see reforms in Pakistan, but this time they want an investment model other than before when they would only deposit a few billion dollars in the state bank of Pakistan. This may be better for the country,” Najeeb told MEE.
What is to be reformed and what next?
Kamal Alam told MEE that it was “very clear” that “the delay in implementing the IMF reforms is because the political elite want to avoid them – there is deep corruption in the government at its core.”
Alam said that “trust in Pakistan’s leadership, at home and abroad” has been completely destroyed by a culture of zero accountability.
Pakistan is ranked 140 on Transparency International’s Corruption Perceptions Index for 2022, not a favorable ranking, Alam said, if the country wants to attract foreign investment.
Najeeb, who worked in the government, said that foreign investment will not solve Pakistan’s problems in the long term and that the country needs to expand its tax base and improve tax collection.
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“Pakistan’s agricultural sector contributes 23 percent of total GDP, and tax collection across the sector is very poor,” he said. “Similarly Pakistan’s retail and real estate sectors contribute significantly to GDP but avoid taxation almost entirely.”
The Saudis are also unhappy with the way Islamabad is behaving these days, Umar Karim said.
“The current prime minister has a cabinet of 77 members, the largest in the world; they all get full benefits and privileges. Why would the Saudis help you if you continue to give yourself such luxury while putting themselves through a drive to cut costs?” he told MEE.
Karim believes that the Saudis are interested in investing in Pakistan’s energy sector – both fossil and renewable fuels – and that they are also interested in investing in the country’s booming IT sector. But this investment, he said, would only happen after Pakistan implemented economic reforms.
Although Pakistan is facing a severe power crisis, Saudi investment in the renewable energy sector could be crucial. A 2020 report by the World Bank indicates that Pakistan has a huge potential to generate power through solar energy.
“Only 0.071 percent of the country’s solar power generation area would be used for Pakistan’s current electricity demand,” the report said.
However, in 2019, the Saudi government expressed interest in establishing an oil refinery and making other investments worth a total of $10bn in Pakistan. But, Najeeb said, Pakistan would have to “reform its investment board” and bring in “specialized human resources and incentives” to take advantage of this opening.
The former adviser to the Ministry of Finance said that a reset in relations with Saudi Arabia would be good for Pakistan and could be a wake-up call.
For Pakistan, the days of easy money are over.