Dubai: The $6 billion (Dh22 billion) support package for Pakistan from Saudi Arabia is expected to stabilise the forex reserves and current accounts temporarily until the country is able to negotiate a longer term loan package according to Pakistan’s Ministry of Finance and analysts.
Saudi Arabia has agreed to the package to bolster Islamabad’s dwindling finances. As part of the package, Saudi Arabia will deposit $3 billion directly with State Bank of Pakistan as balance of payment support and another $3 billion will be provided through deferred payment on oil imports from Saudi Arabia. “This arrangement will be in place for three years, which will be reviewed thereafter,” Pakistan’s Finance Ministry said in a statement.
While the new aid package is expected to cool pressure on financial markets, the rupee and immediate concerns on balance of payment, the country needs a longer-term support package to stabilise its fiscal and external accounts.
"The progress made in achieving macroeconomic stability under the IMF’s Extended Fund Facility-supported programme (2013-2016) has eroded amid slowing fiscal and structural reforms, and international oil prices increased. Against this backdrop, the current account and fiscal deficits have widened."
— Boban Markovic | Analyst with IIF
As widely anticipated, On Wednesday, Pakistan’s finance ministry said the country would seek an IMF bailout to stabilise its economy and replenish dwindling foreign exchange reserves.
“The progress made in achieving macroeconomic stability under the IMF’s Extended Fund Facility-supported programme (2013-2016) has eroded amid slowing fiscal and structural reforms, and international oil prices increased. Against this backdrop, the current account and fiscal deficits have widened, and international reserves have declined to critical levels,” said Boban Markovic, an analyst with Institute of International Finance (IIF).
The new IMF funding when finalised will be the 13th bailout since the late 1980s. The last time was in 2013, when the country got a $6.6 billion loan to tackle a similar crisis. South Asia’s second-largest economy is facing its latest balance-of-payments crisis as imports for Chinese-financed infrastructure projects rise while its exports lag the region.
Analysts said with $6 billion secured in the form of Saudi aid and potential for more from the Gulf states and China, Pakistan may be able to negotiate a better deal with the IMF. In response to the Saudi funding, Pakistan’s main stock market index shot up more than 3.3 per cent.
According to Pakistan’s Finance Ministry estimates, the country will need more than $12 billion to plug its finances as the current-account deficit widens and foreign-currency reserves plummet. Authorities have already devalued the rupee multiple times since December and hiked interest rates the most in Asia. Reserves have plunged more than 40 per cent this year to $8.1 billion.
For months, analysts have warned the new government must act quickly to stem a new current-account crisis, which could undermine its currency and its ability to repay billions in debts or purchase imports.
Pakistan’s Prime Minister Imran Khan is due to travel to China in the first week of November, where he is expected to seek further assistance. The value of Chinese loans given to Pakistan over the last 13 months is close to the $6.2 billion, equal to what the IMF lent it during the last bailout.
Most of the Chinese loans are directly linked to projects associated with China-Pakistan Economic Corridor (CEPC). The Chinese loans in the past are yet to boost Pakistan’s exports to offset the loan repayment, increasingly burdening the economy with rising external debts.
The size of Pakistan’s debts to China has prompted concern from US Secretary of State Mike Pompeo, who told CNBC recently that he would be watching to see whether Khan’s government used IMF funds to pay off Chinese loans.
Before the Saudi aid, it was widely anticipated that Pakistan will be forced to go for a $15 billion bailout programme considering the bulging budget and current account deficits, rising oil prices requirement for yearly rollover of close to $5 billion in short term debt and a $1 billion worth of sukuk maturing in March.
Following the agreement with Saudi for a 3 year funding, analysts estimate that the country may require less than $10 billion through a five-year IMF programme. However analysts say the country should move fast to seal a deal with the IMF.
“Front-loading access [to funds] is warranted to boost credibility and instill market confidence in the programme. If the rollover rate declines or external official creditors limit their funding, then the size of the programme may have to increase. On the other hand, rescheduling the external debt, reintroducing the US CSF (Coalition Support Fund) aid, and lower oil prices could reduce the net financing need,” said Garbis Iradian, chief economist MENA, IIF.