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Oct 24, 2018 | 21:00 GMT

3 mins read

Pakistan, Saudi Arabia: What Riyadh's Economic Lifeline Means for Islamabad

(Stratfor)
The Big Picture

South Asia is the world's fastest-growing economic region and Pakistan recently recorded its highest growth in over a decade — a 5.8 percent year-over-year increase in goods and services. However, the country's lack of an internationally-competitive export industry and its heavy reliance on foreign oil have led to a balance of payment crisis. Unless the leadership in Islamabad can remedy these structural problems, Pakistan will remain ensnared in a boom and bust cycle that will inevitably lead it back to the gates of foreign creditors such as the International Monetary Fund.

What Happened

In an attempt to manage economic concerns, Pakistan's government has garnered much-needed financial assistance from Saudi Arabia. Islamabad hopes that an influx of cash will help avert a payments crisis caused by the country's high trade deficit. Pakistan's Foreign Ministry announced Oct. 23 that Prime Minister Imran Khan had secured $6 billion in debt relief from Saudi Arabia while attending the Foreign Investment Initiative conference in Riyadh, where he met with Saudi King Salman and Crown Prince Mohammed bin Salman. The package includes $3 billion in foreign currency support for one year and allows Pakistan to defer up to $3 billion in oil payments for three years.

Background

Shoring up Pakistan's dwindling reserves of foreign currency is Khan's most serious macroeconomic challenge. As of Oct. 12, net reserves in the State Bank of Pakistan had fallen to $8.1 billion, which is not enough to cover three months' worth of imports in accordance with International Monetary Fund (IMF) recommendations. To remedy this, Pakistan has already initiated talks with the IMF for a possible bailout, marking the 22nd time Islamabad has initiated such a program with the U.S.-based organization since 1958.

Pakistan's widening trade deficit and rising debt and liability payments are the result of a burgeoning energy bill that has depleted the country's foreign exchange reserves. Typically, a country's export earnings offer a source of foreign currency, in many cases U.S. dollars. However, Pakistan's imports are outpacing its exports, causing hard currency to flow out of the country at such an alarming rate that the government is taking urgent measures to remedy the situation. These measures include curbing imports on certain non-essential goods, devaluing the country's currency to make exports cheaper and offering incentives to Pakistani nationals abroad who send home remittances. In addition, Khan plans to discuss further loans when he visits Malaysia and China on Oct. 28 and Nov. 3, respectively.

Why It Matters

The Saudi loan raises important questions about Riyadh's relationship with Islamabad. The kingdom may, for example, expect Pakistan to cool its growing security partnership with Iran. Relations between Riyadh and Islamabad stretch back decades, but Pakistan's increasingly warm relationship with Iran is a more recent development sparked by a shared interest in containing the threat of transnational jihadism branching out from the Islamic State node in Afghanistan. The growing relationship between Tehran and Islamabad will force Pakistan to maintain a balancing act between Iran and Saudi Arabia.

Khan's most recent trip to Saudi Arabia was the premier's second after his ruling Pakistan Tahrik-e-Insaf party came to power in August. Notably, his first diplomatic visit as prime minister was a trip to Riyadh. Although Khan has expressed concern about the death of journalist and Saudi critic Jamal Khashoggi, the premier's decision to attend the conference in Saudi Arabia is a clear indication of his country's priorities. Islamabad's dire economic straits will trump human rights concerns, prompting the Islamic world's only declared nuclear power to increasingly rely on Saudi Arabia, the Islamic world's wealthiest nation, as the two navigate onward. 

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