Pakistan gets breather on $3b Saudi loan

IMF offers flood-relief support without any new loan

ISLAMABAD:

Saudi Arabia has rolled over a $3 billion debt for one year on the existing tough terms and the International Monetary Fund also announced support for Pakistan’s flood-relief efforts but without giving any additional loan.

The two separate announcements by the State Bank of Pakistan on Sunday about the Saudi Arabia rollover and the IMF resident representative may not help change Pakistan’s harsh ground realities that demand massive additional external fiscal support.

Rather, the IMF, after the World Bank, emphasised upon Pakistan to follow “sustainable policies and macroeconomic stability”.

The IMF gave the statement days before a scheduled meeting between Prime Minister Shehbaz Sharif and IMF Managing Director Kristalina Georgieva in New York on the sidelines of the United Nations annual gathering.

“The Saudi Fund for Development (SFD) has confirmed rollover of $3 billion deposit maturing on December 5, 2022 for one year,” the central bank tweeted on Sunday. It added deposits were placed with the SBP and part of its foreign exchange reserves. This reflects continuing strong and special relationship between KSA and Pakistan, the SBP said.

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The central bank reserves remained thin at $8.6 billion. The government was now struggling again to arrest the nosediving rupee, which many believed was also a result of the speculative activities and manipulation by some bankers.

In December last year, Saudi Arabia had extended the $3 billion loan for one year at harsh conditions.

The kingdom already assured the board of the IMF last month of extending the loan repayment period and also providing additional support.

The $3 billion cash facility had been secured at an interest rate of 4%. The rate was by one-fourth times higher than the previous similar facility that Pakistan had obtained at 3.2% interest rate. Pakistan had to accept tough loan conditions due to the prevailing external sector vulnerabilities at that time that were still continuing.

Under the agreement, Saudi Arabia could demand an immediate return of the money in case of a sovereign default by Pakistan.

According to another important clause of the agreement, Pakistan will be bound to return $3 billion to Saudi Arabia within 72 hours of a written request by Saudi Arabia at any time during the term of the agreement.

Saudi Arabia also spelled out the terms of default, which would lead to an immediate withdrawal of cash deposits. A delay in timely interest payment would be deemed as default. The failure by Pakistan to comply with any provision of the cash deposit agreement would lead to default. Also, Pakistan’s failure to service the public external debt of over $100 million will be deemed as default. An end to the IMF membership will also be treated as default.

In case of a dispute, Saudi law will be applicable. Pakistan has also surrendered its sovereign claim of immunity from suit, execution, attachment or other legal processes in relation to the $3 billion cash deposit agreement, the sources added.

IMF statement

IMF Resident Representative Esther Perez Ruiz on Sunday issued a brief statement, making clear the global lender’s approach towards Pakistan in the aftermath of the devastating floods.

Perez said that the IMF was deeply saddened by the devastating impact of the floods in Pakistan, offering sympathies to the millions of victims of the floods.

“We will work with others in the international community to support, under the current programme, the authorities’ relief and reconstruction efforts, and especially their ongoing endeavour to assist those affected by the floods while ensuring sustainable policies and macroeconomic stability,” Perez said.

The IMF’s statement will put an end to discussions that Pakistan was seeking additional financial support to cope with the losses caused by the floods, initially estimated in the range of $18 billion to $40 billion. The statement also suggested that Pakistan could only withdraw the remaining $2.9 billion from the IMF by June next year.

The IMF stated that it would ensure that Pakistan implemented the sound macroeconomic policies, dashing Pakistani authorities’ hope for a major concession against the agreed conditions.

However, the sources said that the IMF was willing to give relaxation to Pakistan, largely to the extent it spent money on flood-related activities from the budget.
The IMF would urge Pakistan that the cost of flood losses would have to be balanced with macroeconomic stability and the agreed policies had to be implemented to address the macroeconomic problems.

Pakistan was facing huge financing requirements – a reality that had not changed even after the floods ravaged the country and would require continuation of macroeconomic stability policies.

A government official said that the IMF would wait for the outcome of the Post Damage and Need Assessment report being carried out with the support of the World Bank, the Asian Development Bank, the United Nations and the European Union before agreeing to any changes in the agreed framework.
The IMF authorities believed that the current IMF programme provided solid structure to address the macroeconomic imbalances. They were also of the view that Pakistan could create some fiscal space for flood operations by prioritising its existing development budget.

An internal preliminary assessment report by the World Bank on the impacts of flood on Pakistan’s economy and poverty stated: “Macroeconomic risks facing Pakistan have been exacerbated by the flooding.

“The government faces a difficult policy challenge in supporting relief and recovery while maintaining progress towards macroeconomic stabilization.”

According to the World Bank report, to manage various risks, it would be critical for Pakistan “to adhere to sound overall economic management and buttress market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures to the extent possible and carefully targeting any new expenditures”.

The World Bank also urged Pakistan to maintain “a tight monetary stance and flexible exchange rate; and remaining on track with critical structural reforms, including in the energy sector”.