Timely help

Pakistan’s allies are continuing to come in handy for us to avert a deeper economic crisis. After Saudi Arabia, the UAE has come to Pakistan’s aid by offering $3 billion in deposits as well as the same amount in oil facility on a deferred payment basis. The UAE’s assistance has come at a crucial time when the Pakistan government is set for renewed talks with the IMF over a bailout package. The question is whether the UAE support was part of the government’s calculations when asking the IMF for an over $12 billion bailout package. According to estimates, the government only needs another $4.5 billion more in external loans to cover the country’s overall $22 billion external financing requirement. The oil facility is set to be approved next month when both the UAE officials and the Saudi crown prince are set to visit the country.

The Pakistan government has told the UAE and Saudi Arabia that their support is not a substitute to the IMF programme, which should lead to caution around the government’s approach to bridging the external financing requirement. Both the UAE and Saudi funding is coming at around a three percent interest rate, and says less about how much the two countries love Pakistan, and more about how credit-worthy they think the country is. The fact that both funders have approved $6 billion in loans and deferred payment facilities to Pakistan suggests that they have been reassured that their amounts will be returned. The loans are a better option than the 8 percent profits offered by the previous government on a range of dollar bond options. The interest rate is less than half that of some of the external financing sought by the last government. The PTI government is also looking to launch a $700 million international bond and it would be interesting to see what kind of interest rate it offers.

It should also be clear that the Saudis and the UAE are both interested in more than Pakistan’s fiscal stability. The Saudis asked for a stake on the CPEC table and a number of investment opportunities, the fate of which should become more clear when the crown prince arrives. The UAE has its own investments in Pakistan to secure. Overall, the finance ministry seems optimistic about the impact of the fiscal support, with a promise that the deposits will ensure the stabilisation of the exchange rate. In principle, the government now has enough foreign exchange reserves on paper to ensure the stabilisation of the exchange rate – if it so wills. What is less clear is what the government’s own approach to the exchange rate matter is – and what the instructions from the IMF will be. For now, the government can be comforted by the fact that the UAE has stepped in to help and that the short-term prognosis is stable.