Will Saudi Arabia steer Pakistan out of its economic quagmire?

Arriving in Riyadh last week, Pakistan’s army chief General Asim Munir attended a bilateral meeting with Saudi Crown Prince Mohammed bin Salman (MbS) at his winter camp in Al Ula.

The visit showcased the historic interdependence between Riyadh and Islamabad, with the new Pakistani army head opting to visit the Kingdom first, like most of his predecessors.

Meanwhile, back home, the details of Munir’s trip were being closely followed. The government has been seeking a financial bailout package from the Kingdom to shore up depleting foreign reserves and it was hoped that the army chief would play a crucial role.

"Pakistan could default by next year if debt restructuring is not undertaken. More than loans, the country needs structural economic reforms, but no political party wants to be unpopular"

As expected, just one day after the army chief met the Crown Prince, Saudi state media announced that “Prince Mohammed bin Salman bin Abdulaziz Al Saud, Crown Prince and Prime Minister, has directed [the Saudi Development Fund (SDF] to study augmenting the Kingdom of Saudi Arabia’s investments in the sisterly Islamic Republic of Pakistan, which have been previously announced on August 25, 2022 to reach $10 billion”.

Over the last few decades, strategic relations between Riyadh and Islamabad have been on a high. Notably, most of the critical developments in these ties have taken place after visits by the Pakistani Chief of Army Staff.

Riyadh plans to provide $10 billion to Pakistan, while fixed cash deposits would be increased to $5 billion. In addition, a $1 billion dollar investment would be made in Pakistan’s oil sector.  

“Pakistan and Saudi Arabia have a weather-tested strategic partnership, their cooperation model fully encapsulates traditional and economic security,” Zubair Faisal Abbasi, a development policy and management specialist in Islamabad, told The New Arab.

“There is enough empirical evidence available that Saudi Arabia bails out Pakistan during an economic crunch and absorbs its human resource exports as well.”

Abbasi added, “Traditional military security is of central importance as Pakistan is strategically located in a region where Saudi Arabia needs allies to operationalise various foreign policy instruments. Therefore, Riyadh responds and takes the Pakistani military leadership seriously.”

However, though Riyadh has made strong commitments, most of the financial assistance will take time, and Islamabad cannot afford much delay as it is struggling to avert an economic default after devastating floods.

So why has Saudi Arabia's response been slower than usual?

Firstly, the biggest hurdle is the International Monetary Fund (IMF). It is unclear whether the Saudi cash deposits will be made at once or if the Kingdom will await the resumption of the IMF program in Pakistan.

Amid depleting foreign reserves, Pakistan’s next IMF money tranche hangs in the balance. But in working out ways to increase assistance and investments alongside climate change relief after this year’s deadly floods, the Saudi Development Fund would still take a while to be implemented.

“The Saudis also realise along with the Chinese, Qatar, UAE, etc. that Pakistan must undertake substantial economic reforms to avoid their assistance just going into a black hole otherwise they would have already given it by now,” Zeeshan Shah, an analyst at FINRA in Washington told The New Arab.

“Thus, Pakistan’s agreement with the IMF with regards to implementing the agreed upon rescue package is crucial as I would not expect this assistance to be forthcoming until the IMF agrees to release the next tranche.”

"The Saudis also realise along with the Chinese, Qatar, UAE, etc. that Pakistan must undertake substantial economic reforms to avoid their assistance just going into a black hole"

Furthermore, previous investment plans by Gulf Cooperation Council (GCC) states to purchase state-owned enterprises also remain unfinalised and a large oil refinery planned by the Kingdom has not been started yet due to insufficient preparation from Pakistan’s side.

“Pakistan requires international support in the short, medium, and long term. The short-term support is needed to maintain foreign currency reserves and keep international trade afloat, avoid shortages and inflationary pressure,” Abbasi said.

“However, Pakistan needs medium to long-term support to maintain and diversify its export markets including the infrastructure capacity to produce an exportable surplus.”

Qatar and the UAE have offered to help Pakistan, with similar support planned for Egypt. Islamabad has also had some success at a fundraising event in Geneva and received pledges worth $9 billion due to its climate change diplomacy.

According to Abbasi, “It is the medium to long-range future which can make the real difference since Pakistan can export its information technology products and platforms, especially a long-range of e-governance and civil registry systems”.

Political factors may have also caused some delays, with the ongoing political chaos in Pakistan making Riyadh reluctant to side with any party.

“The Saudis probably preferred to have it [financial assistance] come out during Asim Munir’s visit as compared to the PM taking Pakistani domestic politics into consideration,” Shah said.

“The Saudis have probably been thinking about giving economic assistance for some time as has been reported in the press, and I believe that Saudi support is probably coming with a wink and a nod from Washington.”

Unfortunately, most of Pakistan’s problems have arisen due to its own policies and political instability. According to economists, Pakistan could default by next year if debt restructuring is not undertaken. More than loans, the country needs structural economic reforms, but no political party wants to be unpopular.

As of now, a 10% gap exists between the official dollar currency rates and the open market, which has caused informal channels to thrive.

Riyadh’s new geopolitical re-alignments might also have had an impact on its foreign policy, notably its growing relations with China and India.

But while Riyadh’s closer ties with New Delhi as its largest oil importer might alarm Islamabad, the Kingdom’s upbeat synergy with Beijing could also give Pakistan moral support and counterbalance the Indo-Saudi factor.

"It is unclear whether the Saudi cash deposits will be made at once or if the Kingdom will await the resumption of the IMF program in Pakistan"

In fact, with both being members of China’s Belt and Road Initiative (BRI), Riyadh and Islamabad can move even closer.

“Ties between Pakistan and the Saudis have always been security based, though there are economic ties as well due to the large Pakistani ex-pat population in Saudi Arabia which sends remittances back,” Shah said.

“But those security ties won’t cross certain boundaries as Pakistan tries to maintain a neutral stance in the Iran-Saudi rivalry and refused to take part in the Saudi war in Yemen.”

Throughout these developments, Pakistan has provided a security guarantee for holy sites in Saudi Arabia, while Riyadh has helped by providing oil on easy terms or financial support at various critical junctures in the past.

At the end of the day, the Pakistan-Saudi equation can be said to be too firmly entrenched to be affected by any ‘slow phase’ in relations.

Sabena Siddiqui is a foreign affairs journalist, lawyer and geopolitical analyst specialising in modern China, the Belt and Road Initiative, Middle East and South Asia. 

Follow her on Twitter: @sabena_siddiqi