EDITORIAL: Reports carried in a section of media reveal that China under an augmentation of the 2011 bilateral currency swap arrangement will extend 1.5 billion dollars to Pakistan for repaying one billion dollars to Saudi Arabia on 14 December 2020. This is in addition to the one billion dollars that Pakistan repaid in August 2020 which was also covered by China. As per a Foreign Office press release dated 23 October 2018, Saudi Arabia provided a "deposit of USD 3 billion for a period of one-year as balance of payment (BoP) support and a one-year deferred payment facility for import of oil, up to USD 3 billion - an arrangement in place for three years, which will be reviewed thereafter." This significant assistance, to bridge the 20 billion dollar current account deficit that the Khan administration inherited, was extended after the visit of Prime Minister Imran Khan to Saudi Arabia at the invitation of the Custodian of the Two Holy Mosques King Salman bin Abdulaziz to participate in the Future Investment Initiative Conference on 22-23 October 2018.
There was no independent confirmation from the Saudi government as the Saudis have always been reticent about publicly acknowledging assistance to any country. It may be recalled that Saudi Arabia reportedly extended a grant of 1.5 billion dollars to Pakistan in March 2014 to shore up our dwindling reserves, which was never referred to by the then government officials other than as a grant from a friendly country.
The original term of the Saudi Arabian loan as revealed in the Foreign Office press release expired in October 2019 though the three year oil facility, unless used up to the extent of 3 billion dollars, should be applicable till the next calendar year. In other word those who argue that recalling the loan or the facility is an outcome of divergent geopolitical considerations of the two Islamic countries are technically not correct.
The need for the government to meet the gap left by repayment to Saudi Arabia on an emergent basis is premised on the terms of the agreement with the International Monetary Fund (IMF). In documents dated July 2019 uploaded on its website, the Fund noted one key, albeit atypical condition, that while "the Fund supported programme is expected to coalesce broader support from multilateral and bilateral creditors in excess of US$ 38 billion...crucial to meet its large financing needs in the coming years...the authorities have already secured the full financing for the first year and have received firm commitments from key bilateral partners to maintain their exposure throughout the programme period, including by extending new loans consistent with the programme objectives." It is unclear whether the commitment was made by Saudi Arabia to maintain its exposure till the end of the 39-month programme or whether China had pledged taking up the slack as and when a financing gap emerged. Whatever the agreement the fact remains that China has emerged as perhaps a key if not the only ally that has the capacity and the intent to tide us over in terms of the necessary balance of payment (BoP) support.
Finance Ministry and the State Bank of Pakistan (SBP) are tight lipped about the recall of another billion dollars by Saudi Arabia referring to it as a "bilateral confidential matter"; however, two disturbing elements need highlighting. First, the ongoing negotiations with the IMF for the release of the second tranche would have stalled had not China met the gap, reportedly one of many other politically challenging, conditions; and secondly, the Pakistani authorities concerns with respect to the foreign exchange reserve position persist notwithstanding the claim of a rise in reserves in recent weeks. The swap arrangement offered by China implies that this would not be considered as debt in Pakistan's accounts, like other swap arrangements, though Pakistan would have to pay interest charges.
What should be a source of serious concern for the government is the fact that domestic government borrowing has risen by a whopping 397 billion rupees during the first four months of the current year (against 322.9 billion rupees in the first three months) - a highly inflationary policy. In July September 2019 (as per the summary of consolidated federal and provincial budgetary operations), the government borrowed 119.5 billion rupees domestically - 242.5 billion rupees non-bank (sourced to high interest rates attracting higher savings through national savings schemes) and negative 123 billion rupees bank borrowing while in the comparable period of this year the government borrowed 230.8 billion rupees from banks and 92 billion rupees from non-bank sources (a change reflecting low public savings due to high inflation and salary freeze). These are fundamental issues that no doubt are stumbling blocks in the way of reaching a staff level agreement with the Fund, a prerequisite for the release of the next tranche. It is, however, to note that while sales of some products are rising due to the government easing on its severe contractionary fiscal and monetary policies yet by reliance on the same tools - realignment of external borrowing into swap arrangements and heavy domestic borrowing - the economic situation remains challenging to say the least.
Copyright Business Recorder, 2020
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