Saudi loans help Pak economy stay afloat

Saudi Arabia remains the major source of cheap foreign loans for Pakistan, rolling over $5 billion in loans at an annual interest rate of 4% — about one-third cheaper than Chinese cash deposits and less than half the cost of foreign commercial borrowing.

Official records show that Riyadh charged a 4% interest rate on two separate cash deposit facilities obtained by Islamabad in recent years. The loan, originally contracted for one year, has yet to be repaid. Government officials said the kingdom has been rolling it over annually without imposing additional costs.

A $2 billion Saudi cash deposit facility is set to mature in December, which the Ministry of Finance plans to have rolled over again, sources said. They added that another $3 billion Saudi loan — obtained to plug the external financing gap under the IMF programme — will mature in June next year.

The IMF has stipulated that Pakistan's three bilateral creditors — Saudi Arabia, China and the United Arab Emirates — must maintain their cash deposits until the completion of the three-year programme. Together, these countries have provided $12 billion in deposits, forming the bulk of the central bank's $14.3 billion gross foreign exchange reserves.

Unlike in the past, IMF programmes are no longer helping Pakistan in a big way. Despite the package, the central bank had to purchase over $8 billion from the local market to meet maturing debt obligations. At the same time, the Finance Ministry is increasingly dependent on multilateral banks' credit guarantees to access international markets, as the global lender's economic "clean bill of health" is no longer sufficient on its own.

Pakistan and Saudi Arabia this week signed a landmark strategic mutual defence agreement which, according to the Foreign Office, reflects the shared commitment of both nations to bolster security, promote regional peace and jointly deter any aggression.

To a question by an Express News correspondent regarding the economic aspect of the defence agreement, the Foreign Office spokesperson said that the Pakistan-Saudi relationship is multifaceted. Defence has been a very critical and important component of it. Just as defence is important, economic cooperation is also an important component. But at the same time within the overall ambit, these are different tracks, said the spokesperson.

He added that the Pakistan-Saudi relationship is overseen by the Pakistan-Saudi Supreme Coordination Council, an overarching framework built on three pillars, one of which is economic. While these pillars are interlinked, each is designed to strengthen cooperation independently of the others. So, economic cooperation remains robust, and we look forward to further deepening economic cooperation between the two countries, according to the spokesperson.

Sources said that while Saudi loans carry a 4% interest rate, Pakistan is paying around 6.1% on four cash deposit facilities worth $4 billion. These facilities are priced at the six-month Secured Overnight Financing Rate (SOFR) plus 1.72%, making them significantly more expensive than Saudi deposits. However, the Saudi Oil facility of $1.2billion is obtained at a flat 6% interest rate, sources added.

The Chinese facilities, maturing between March and July next year, are also expected to be rolled over in light of IMF conditions and Pakistan's low foreign exchange reserves.

Among the costliest foreign commercial loans was one from Standard Chartered Bank, which extended $400 million for six months at an interest rate of 8.2% in the last fiscal year. The loan was contracted at the six-month SOFR plus a 3.9% margin, sources said.

Likewise, the United Bank Limited arranged a $300 million loan for merely 10 months at an interest rate of 12-month SOFR plus 3.5%, which was also equal to 7.2% interest rate, sources added. The UAE had initially given a $2 billion loan to Pakistan at an interest rate of 3% but its last $1 billion facility was obtained at 6.5% in 2024 ahead of the IMF deal.

Pakistan also obtained a $1 billion loan from the commercial banks for a period of five years at an estimated rate of 7.22%. Over 7.2% rate is paid despite the Asian Development Bank having provided partial guarantees to the foreign lenders, said sources.

Pakistan is also availing Chinese commercial loans, which are now converted into Chinese currency from USD. The rates on these Chinese facilities vary. The $2.1 billion equal Chinese commercial facility is refinanced for a period of three years at roughly 4.5% interest rate, said sources.

Likewise, the $300 million Bank of China loan is taken for two years at 6.5% interest rate and another $200 million is obtained at 7.3% interest rate, sources added. A $1.3 billion loan from Industrial and Commercial Bank of China was taken at a flat 4.5% interest rate.