$2b Saudi injection boosts forex reserves

ISLAMABAD:

Pakistan on Tuesday received a $2 billion Saudi loan for one year as part of a plan to raise funds under a condition set by the International Monetary Fund (IMF) for the new bailout package, providing a breather to beleaguered government.

Finance Minister Ishaq Dar announced that the State Bank of Pakistan (SBP) had received $2 billion from Saudi Arabia, which raised the kingdom’s financial exposure to Pakistan to $5 billion.

The minister did not officially disclose the terms of the loan but a senior cabinet minister had said two weeks ago that Saudi Arabia had given the loan for one year and the interest rate was higher than the previous facility rate of 4%.

On the condition of anonymity, the minister had also said that Saudi Arabia had made the move due to the overall increase in global interest rates.

The one-year London Interbank Offered rate was 5.9% this week.

Pakistan had requested Saudi Arabia for a $3 billion loan a few months ago. During the maiden visit of Chief of the Army Staff General Asim Munir, Saudi Arabia had pledged $2 billion subject to Pakistan’s deal with the IMF.

The disbursement has been made a day before the IMF Executive Board is scheduled to take Pakistan’s case for the approval of a new $3 billion Stand-By Arrangement (SBA).

The IMF has identified a $6 billion financing gap for this fiscal year, which Pakistan has promised to fill with the help of bilateral and the multilateral creditors.

The finance ministry has received Rs555 billion cover against the $2 billion Saudi loan, a senior finance ministry official confirmed.

On the news of the Saudi loan, the rupee recovered its lost value by around Rs1.23 on Tuesday and closed at Rs 278.57. A day earlier, the rupee had lost its value by nearly Rs2 against the dollar.

These sporadic improvements are driven by some good news, as economic fundamentals remain weaker.

Pakistan has so far received $11 billion worth of foreign deposits, including the fresh loan. These include $5 billion from Saudi Arabia, $4 billion from China, and $2 billion from the UAE. These deposits have been received for one year but Pakistan could never return the money due to its fragile economic position.

The $11 billion deposits are far higher than the estimated $6.4 billion foreign exchange reserves after the $2 billion Saudi injection.

“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 said in a statement.

“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 their great gesture and support by placing the said deposit of $2 billion with the SBP,” the minister said.

Prime Minister Shehbaz Sharif also expressed his gratitude to Saudi Arabia and Crown Prince Mohammed Bin Salman for ensuring financial support to Pakistan.
“This deposit will strengthen Pakistan’s foreign exchange reserves. It reflects the growing confidence of our brotherly countries and the international community in Pakistan’s economic turnaround. We remain committed to making all necessary efforts to improve Pakistan’s economy,” the prime minister said.

The prime minister also appreciated Finance Minister Dar and army chief General Asim for their efforts in this regard.

Of the $4 billion Chinese deposit, $1 billion is maturing this month that is expected to be rolled over again. Similarly, the $3 billion old Saudi deposit is also maturing in December this year, which Pakistan also hopes will be extended further by one year.

Last year, the Saudi Fund for Development (SFD) had rolled over a $3 billion deposit maturing on December 5, 2022 for one year. These deposits were placed with the SBP and part of its foreign exchange reserves.

The $3 billion cash facility had been secured at an interest rate of 4%. The rate was higher than the previous similar facility that Pakistan had obtained at 3.2% interest rate in 2018.

In 2021, Pakistan had to accept tough loan conditions for $3 billion Saudi deposits due to the prevailing external sector vulnerabilities at that time. However, those vulnerabilities were still continuing.

Under the previous 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 $3 billion agreement, Pakistan would 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, the Saudi law will be applicable. Pakistan had 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.

Pakistan has so far been fulfilling its all international sovereign obligations, although there have been severe restrictions on imports to save the foreign exchange reserves.