Pakistan’s ailing government was given a break on Tuesday after receiving a $2 billion Saudi loan for one year as part of a strategy to generate funds in accordance with a requirement set by the International Monetary Fund (IMF) for the latest bailout package.
Pakistan’s Minister of Finance Ishaq Dar revealed that Saudi Arabia had loaned the country $2 billion, bringing the total amount of money the kingdom owes Pakistan to $5 billion.
A senior cabinet minister had announced two weeks ago that Saudi Arabia had offered the loan for one year at an interest rate that was higher than the previous facility rate of 4%, but the minister did not officially disclose the conditions of the loan.
The minister, who spoke on the condition of anonymity, also stated that rising interest rates throughout the world were a factor in Saudi Arabia’s decision.
This week, the one-year rate offered by the London Interbank Offered market was 5.9%.
Just a few months ago, Pakistan approached Saudi Arabia about borrowing $3 billion. General Asim Munir, Pakistan’s chief of staff, visited Saudi Arabia for the first time and secured a $2 billion pledge, contingent on Pakistan’s agreement with the IMF.
The transfer comes one day before the International Monetary Fund’s Executive Board is set to vote on whether or not to grant Pakistan a new $3 billion Stand-By Arrangement (SBA).
Pakistan has committed to filling the IMF-identified $6 billion financial deficit for this fiscal year with the assistance of bilateral and the multilateral creditors.
A top finance ministry official has revealed that the ministry has received Rs555 billion in cover against the $2 billion Saudi loan.
The news of the Saudi financing helped the rupee recover some of its lost value, as it ended Tuesday at Rs 278.57, up by about Rs1.23. The Indian currency dropped about Rs2 (about a quarter of a cent) against the dollar the day before.
Despite some encouraging data, economic fundamentals continue to be weak.
The new loan brings Pakistan’s total foreign investment to date to $11 billion. The Saudis contributed $5 billion, the Chinese contributed $4 billion, and the UAE contributed $2 billion. Even if Pakistan’s economic situation improved, it would never be able to repay these deposits, which have been sitting there for a year.
The $11 billion deposited is significantly more than the $6.4 billion in foreign exchange reserves that were expected before the $2 billion injection from Saudi Arabia.
“This inflow has increased the forex reserves held by the SBP and will accordingly be reflected in the forex reserves for the week ending on July 14, 2023,” Dar added.
The minister said, “On behalf of the prime minister and the army chief, I extend our heartfelt thanks to the leadership of the kingdom of Saudi Arabia” for the $2 billion deposit made with the SBP.
Pakistan’s Prime Minister Shehbaz Sharif has thanked Saudi Arabia and its Crown Prince Mohammed Bin Salman for their financial aid.
The influx of funds into Pakistan’s foreign exchange reserves is greatly appreciated. This shows that our sister states and the international world have faith in Pakistan’s economic recovery. The prime minister affirmed, “We remain committed to making all necessary efforts to improve Pakistan’s economy.”
The prime minister also lauded the contributions of Finance Minister Dar and Army Chief of Staff General Asim.
One billion dollars of China’s $4 billion deposit is due to mature this month, and it will likely be refinanced. Similarly, Pakistan is counting on Saudi Arabia to renew a $3 billion deposit that is set to expire in December of this year.
The Saudi Development Fund (SFD) extended by a year a $3 billion deposit due to expire on December 5, 2022. These funds are part of the SBP’s foreign exchange reserves and were deposited with it.
The interest rate on the $3 billion cash facility was set at 4%. The rate was higher than the 3.2% interest rate on Pakistan’s previous, equivalent facility, which it had received in 2018.
Due to the state of its external sector in 2021, Pakistan was forced to accept stringent loan conditions in exchange for $3 billion in Saudi deposits. The problem, though, was that the vulnerabilities persisted.
In the event of a sovereign default by Pakistan, the earlier arrangement allowed Saudi Arabia to seek immediate repayment of the funds. Furthermore, if Saudi Arabia ever makes a written request for the return of the $3 billion, Pakistan will be obligated to restore the money to them within 72 hours.
Saudi Arabia also detailed the consequences of default, including the instant confiscation of deposits. Default would occur in the event that interest payments were not made on time.
Default would occur if Pakistan violated the terms of the cash deposit arrangement in any way. In addition, Pakistan will be considered to be in default if it fails to make payments on its public foreign debt of more than $100 million. A termination of participation in the IMF will likewise be considered a default.
In the event of a legal dispute, Saudi law will take precedence. The sources further noted that in respect to the $3 billion cash deposit deal, Pakistan has waived its sovereign claim of immunity from suit, execution, attachment, or other legal processes.
Although imports have been severely restricted in order to preserve foreign exchange reserves, Pakistan has so far met all of its international sovereign obligations.
