Saudi Arabia deposits $3 billion in Pakistan’s central bank

KARACHI: Pakistan on Saturday received a $3 billion deposit from Saudi Arabia, the prime minister’s finance advisor said, which will help shore up the country’s foreign currency reserves and stabilise the local currency.

The Saudi money comes when Pakistan is facing deterioration in the balance of payments position amid depleting foreign exchange reserves and weak inflows. High current account deficit weighed down by the soaring import bill continues to put pressure on the rupee.

“Good news, $3 billion Saudi deposit received by SBP. I want to thank His Excellency Crown Prince Mohammed Bin Salman and Kingdom of Saudi Arabia for the kind gesture,” advisor to the Prime Minister on Finance and Revenue, Shaukat Tarin said in a Tweet. The reserve deposit is part of a $4.2 billion financial support package that the Kingdom of Saudi Arabia pledged for the country in October. Under the package, it said it would place $3 billion deposits with the State Bank of Pakistan (SBP) and provide funding of deferred oil supply for $1.2 billion.

Earlier this week the SBP signed an agreement with the Saudi Fund for Development (SFD) to get the loan. Now, the SFD has deposited the amount in the SBP’s account for one year at 4 percent.

A falling import cover is a source of discomfort for the government. However, with the fresh inflows received, the country’s reserves have increased to $25 billion and the central bank’s reserves rise to $19 billion. That would be sufficient to pay three months of imports given monthly imports of around $8 billion.

The country’s reserves dropped one percent to $22.5 billion as of November 26. The reserves held by the SBP stood at $16 billion, down 1.5 percent from a week ago.

“Saudi money will provide some support but looking at the fast rising import bill this amount alone will not be enough,” said Mohammed Sohail, CEO at Topline Securities. “Pakistan urgently needs import reducing measures along with IMF and other lenders’ support.”

A heavy dependence on imported energy, (especially in the situation when global oil prices are skyrocketed), food and machinery means Pakistan has a current account gap, which it has largely funded by external financing followed by remittances and the exports.

And IMF loan programme, stalled earlier this year on differences over the needed reforms, also led to dry up inflows from other multilateral sources and made the country’s balance of payments position vulnerable to fragility.

The country posted the highest ever monthly trade deficit of $5.1 billion in November. Exports rose 34 percent year-on-year to $2.9 billion, while imports soared 95 percent YoY to $8 billion. Trade gap jumped 117 percent to 20.8 billion in the five months of this fiscal year with exports reaching $12.4 billion and imports 33.1 billion, respectively.

The rising current account gap and the decreasing reserves forced the rupee to depreciate by 10.88 percent since the start of July and hit a record low of 176.77 to the dollar on Friday. The current account deficit widened to $1.66 billion in October from $1.13 billion in September.

“It [Saudi deposits] is expected to help in reducing currency volatility going forward,” said Tahir Abbas, the head of research at Arif Habib Limited.

However, analysts and the economists raised questions over the terms and conditions on which Saudi Arabia is providing financing to Pakistan.

The conditions that a longtime ally Saudi Arabia can demand that Pakistan pay back the loan on 72 hours’ notice with or without giving any reason are not comfortable for the country.

Besides, in case of a dispute, Saudi law will be applicable. Pakistan is likely to issue a Sukuk of $1 billion soon and also to secure $1 billion in IMF loans once its board grants approval for the same next month.