Saudi Financial Aid to Pakistan Serves Multiple Purposes

2 November 2021 Tridivesh Singh Maini, FDI Visiting Fellow

In the midst of Pakistan’s serious economic challenges, Saudi Arabia’s offer of US$4.2 billion in financial assistance will help to bring Saudi-Pakistan relations back on track. The Saudi move is also intended to signal that, while improving ties with India, it also wants to check any further deterioration of links with Pakistan and that, in spite of the recent rising clout of the UAE and Qatar, Riyadh is still the dominant strategic player in the Gulf.

 

Background

Saudi Arabia has agreed to provide US$4.2 billion (~$5.6 billion) by way of financial assistance to Pakistan. Pakistani Prime Minister, Imran Khan who visited Riyadh, referring to the Saudi decision to provide assistance said:

I want to thank HRH Prince Mohammad bin Salman for supporting Pak with $3 bn as deposit in Pak’s central bank & financing refined petroleum product with $1.2 bn. KSA has always been there for Pak in our difficult times incl now when world confronts rising commodity prices [sic].

Pakistan’s Information Minister, Fawad Chaudhry, made an announcement regarding that decision before a formal announcement was made by the Prime Minister’s adviser on finance and revenue, Shaukat Tarin, and Energy Minister Hammad Azhar.

 

Comment

Saudi Arabia committed US$3 billion ($4 billion) in cash and a further US$3 billion ($4 billion) in deferred payments for oil imports in 2018, to help Pakistan deal with its current account crisis, during Imran Khan’s visit in September 2018. Unsurprisingly, Saudi Arabia was Mr Khan’s first overseas visit as Prime Minister.

Saudi Arabia was also one of the countries that expressed their interest in investing in Gwadar Port, an important component of the China Pakistan Economic Corridor (CPEC). An agreement on Saudi participation in the CPEC was first negotiated during Mr Khan’s visit to Saudi Arabia. During his visit to Pakistan in February 2019, Saudi Crown Prince Mohammed Bin Salman signed MOU’s with Pakistan worth an estimated US$20 billion ($26.6 billion), including a US$10 billion ($13.3 billion) oil refinery at Gwadar. Petrochemicals aside, other sectors in which MOU’s were signed included power and mining. The Crown Prince said that ‘Pakistan is going to be a very, very important country in the future and we want to be sure we are part of that’.

After the Saudis’ evinced interest in investing in the Gwadar project, there was talk of the emergence of a Pakistan-China-Saudi Arabia partnership. Pakistan, by bringing Saudi Arabia on board the CPEC project, thought that it could send out a global message that the CPEC is not entirely China-driven. It was said that Beijing was not happy with Islamabad bringing Riyadh on board the CPEC, however, and senior Pakistani officials consequently stated that Saudi investments in Gwadar did not fall under the CPEC umbrella but were a bilateral agreement between Saudi Arabia and Pakistan. While China denied that it was unhappy with Saudi participation in CPEC, a senior Chinese Foreign Ministry spokesman remarked that:

If any other party would like to contribute positive factors to promote the interconnectivity and prosperity of the region on the basis of consultation, I think this is a positive factor.

Earlier this year, however, Saudi Arabia cancelled its investment in Gwadar Port. A Minister in the Imran Khan Cabinet said that Saudi Arabia would construct a refinery and a petrochemical complex at Karachi, not Gwadar. That decision was attributed to souring ties between the two countries after Pakistan Foreign Minister Shah Mehmood Qureshi, in a media interview in August 2020, expressed disappointment that the Saudi led Organisation of Islamic Co-operation (OIC) had not called a meeting of its members’ Foreign Ministers to discuss the situation in Kashmir. He had also said that if the OIC is unable to do so, Pakistan would call a meeting of Islamic countries. Saudi Arabia continues to be was miffed with Islamabad for asking for the return of US$1 billion ($1.3 billion) of the US$3 billion it had lent Pakistan in 2018.

In recent months, given the changing geopolitical situation and Pakistan’s economic challenges, attempts have been made by both sides to mend bilateral relations. In June 2021, Pakistan announced that Saudi Arabia would supply it with US$1.5 billion ($2 billion) worth of oil a year. The timing of Saudi support for Pakistan is important for several reasons.

Saudi’s Decision: The Larger Geopolitical Situation

First, Riyadh needed to show that it is still a decisive player in the Middle East. In recent months, the strategic clout of other GCC countries, especially Qatar, due to its role in mediating the US-Taliban agreement, and the role of the UAE, not just in the Middle East but in the India-Pakistan ceasefire in February 2021, rose considerably. According to some analysts, that ascendance sent out a message that Riyadh’s clout was diminished. As it is, after President Biden’s election, there has been a change in US policy towards Saudi Arabia. Riyadh remains an important US ally but the nature of the relationship is different from that under the Trump Administration.

Looking at the Saudi decision and its relevance to Pakistan, first, the Saudi announcement comes at a time when Pakistan faces numerous economic challenges. Its currency has depreciated significantly and inflation has risen. While the IMF committed assistance of US$6 billion ($8 billion) in 2019, Pakistan has only received US$2 billion ($2.65 billion). Pakistan is in talks with the IMF for a further tranche of US$1 billion ($1.3 billion). Mr Khan’s Adviser for Finance categorically stated that the Saudi Arabian assistance is not linked to the IMF loan.

On 21 October 2021, the Financial Action Task Force (FATF) announced that Pakistan would remain on its grey list. That decision significantly reduces Pakistan’s options regarding funding from multilateral institutions. As a result, Islamabad’s dependence on its partners will increase. Non-compliance with the FATF’s demands could also lead to black listing.

Finally, while Saudi Arabia’s bilateral relationship with India has grown, the Kingdom would also like to get relations with Pakistan back on track, lest the latter moves closer to Iran.

In conclusion, Saudi Arabia’s decision to aid Pakistan will help to improve bilateral relations and provide temporary relief to the Pakistani economy. Pakistan cannot be totally dependent upon Beijing and, given the state of its relationship with the US, it is unlikely to get much support from Washington. It is thus left with limited options.

About the Author

Tridivesh Singh Maini is a New Delhi-based Policy Analyst and FDI Visiting Fellow.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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