Saudi support

Saudi Arabia has provided another lifeline to the Pakistani economy, promising a $3 billion loan and $1.2 billion worth of oil on deferred payments. The cash will reportedly be parked with the State Bank for three years, while the deferred oil facility will run for two years. The assistance will be critical in easing the current cash crunch facing the government as talks with the IMF continue to drag on.

The loan will carry ‘roughly’ the same interest rate as money lent by the IMF, World Bank, and other international financial institutions. It is, however, not yet clear if the money is a substitute for the IMF deal, where it appears increasingly unlikely that Islamabad will implement the harshest policy measures required by the international lender. There is speculation that this may be the case because, despite the bad current account situation, Pakistan still has significant foreign currency reserves — about $17.5 billion.

Still, despite solid reserves, the rupee has taken a massive hit in recent weeks, partly because of the government’s failure to reach an agreement with the IMF. The Saudi deal will certainly help slow that slide, and hopefully, reverse it. In fact, it has already started to: the rupee appreciated around 1.44%, or Rs2.49, against the greenback to settle at Rs172.78 in the inter-bank trading on Wednesday. The fall in the value of dollar also took some shine off gold whose per tola rate in the country declined by Rs7,800 to Rs124,200.

But the new deal is also a reminder of the continuing dependence on foreign assistance to stabilise the economy — a simple delay on a $1 billion loan instalment helped cause the current instability, despite several other loan and deferred payment deals to reduce stress on the current account in the short term. Even without further hiccups, these loans will come due, and the cycle will inevitably repeat itself unless policymakers get their acts together.