Saudi Arabia has agreed to renew a $3bn deposit at Pakistan’s central bank to bolster the south Asian state’s depleted foreign reserves as Islamabad negotiates an aid package with the IMF, according to people familiar with the deal.
The world’s top oil exporter, which has traditionally provided financial aid to Islamabad, has also agreed to support Pakistan with $1bn in petroleum products over 10 months.
The assistance could help Pakistan secure a $1.2bn payment from the IMF, whose board is set to meet this month to approve the disbursement.
The IMF agreed last month to increase its loan package by $1bn to $7bn but has conditioned the disbursement on assurances that Pakistan receives additional financial support from elsewhere.
“Saudi Arabia has agreed to roll over its $3bn deposits in Pakistan’s state bank [central bank] reserves, which will help to revive the IMF loan,” said a senior Pakistani official.
The official said Pakistan, the IMF, and Saudi Arabia had also discussed the possibility of Islamabad being able to borrow up to $2.8bn against Riyadh’s quota of Special Drawing Rights (SDRs) at the fund.
“Once finalized, Pakistan’s extent of borrowing from the IMF during the present financial year [July to June] will increase by $2.8bn. This will be a very important gesture,” the official said.
Saudi Arabia and the IMF declined to comment.
Investors have become increasingly concerned that Pakistan could be at risk of default as it struggles with a widening current account deficit and a depreciating currency amid soaring commodity prices and tighter credit conditions.
The country’s foreign exchange reserves have fallen to about $9bn after Russia’s invasion of Ukraine in February caused a surge in global energy and food prices.
Fitch Ratings revised its outlook for the country to negative from stable last month because of what it called a “significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022”.
Analysts have warned that if the IMF signs off on the deal, Pakistan will need to push tough economic reforms as it has repeatedly failed to plug gaps in its fiscal framework. For example, it has not increased the proportion of the population that pays income tax from the current figure of less than 2 percent.
“We seem to think Pakistan has liquidity or a financing issue. There is a huge solvency issue. We have to look at Pakistan’s expenditure side,” said Shahid Kardar, a former governor of Pakistan’s central bank. “Pakistan’s expenditures have to be reduced considerably.”
The IMF said last month that Pakistan was “at a challenging economic juncture”. “A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels,” the fund said.
Originally published on www.ft.com