State Bank of Pakistan
The new funds from Saudi Arabia will come in quite handy for State Bank of Pakistan. Image Credit: Bloomberg

Islamabad: The Saudi Fund for Development (SFD) will deposit $3 billion with the Pakistan central bank and boost that country’s foreign reserves.

“It will help support Pakistan’s foreign currency reserves and contribute towards resolving the adverse effects of the pandemic,” the State Bank of Pakistan said in a statement. The understanding reflects the “strong relationship” between Pakistan and Saudi Arabia and dispel the claims of a decline in economic ties, experts said.

The Saudi entity also has an agreement with Pakistan’s Ministry of Economic Affairs to finance the trade of oil derivatives worth $1.2 billion for one year to Pakistan. These agreements “will contribute to the country’s economic growth and help resolve the adverse repercussions of the pandemic,” said the CEO of SFD, Sultan Bin AbdulRahman Al-Marshad.

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Analysts described the $3 billion deposit from Saudi Arabia as “critical and timely” for economic recovery. “The inflow - which is significantly more than the remaining IMF’s loan - gives Pakistan a cushion to steer the direction towards stability, restore investor confidence, tap global markets and tide over the presumed transitory inflation bout,” Asif Arsalan H. Soomro, an analyst, said.

Pakistan’s foreign exchange reserves fell more than $4 billion since the all-time high at $20.3 billion in August. The funds would help “reduce currency volatility, improve government’s bargaining power with lenders, reduce the cost of borrowing in global bond issuance and buy time to restore the confidence of the markets,” said Soomro, a former managing director at leading stock brokerage KASB Securities and senior advisor to Swedish asset manager Tundra Fonder AB.

However, Soomro cautioned that the “borrowed funds add to the piles of debt” - a crisis that can only be resolved with sustainable export growth, localisation and increased agri-productivity.

The boost in economic ties came following the October visit of Pakistan’s Prime Minister Imran Khan to Saudi Arabia.