Izzat Hayat talks about an important change in Saudi
Pakistan’s financial woes are the result of Altered Saudi perception & decades of profligacy that was never reined it even when matters were clearly getting out of hand. The ever-increasing gap between income and expenditure ensured that the country became excessively dependent upon foreign loans with the ultimate consequence that the foreign debt servicing consumed the bulk of country’s income. The situation has reached the stage where loans are obtained to pay debt and this situation is self-defeating. The pitiable aspect is that successive governments deliberately ignored the horrid consequences of increasing debt and conveniently kept on piling more debts. Unfortunately, living on borrowed money became a norm in the country and no one actually seriously contested this living practice and voices that were raised against it were muffled. The practice became so well entrenched that the new generations accepted it as fait accompli and accepted it hands down. This fatal practice was actually quite celebrated as obtaining every loan became a national news broadcast on media widely along with obtaining the loan becoming kind of an achievement.
Gradually what emerged was that every loan deal became dependent upon the implementation of prior actions by Pakistani governments that slowly became tough. Though governments tried keeping such tough conditions under wraps as they never wanted such conditions due to the fear of a political backlash but there came a time when it was not found possible to hide such conditions. While governments made the conditions public but never bothered about the adverse public reaction as they were confident that they could overcome any negative reaction. Successive Pakistani governments were exposed to the risks of compromising the country’s sovereignty though they paid not much heed to such dangers. The heavily debt-ridden economy of the country worryingly indicates that Pakistani nation is not prepared to change their lifestyle. In this context it is noted that Pakistan’s excessive external indebtedness has deep structural roots and the country cannot come out of the debt trap unless the country decides to revamp the economy, mobilise tax and non-tax revenues to match national expenditure needs and boost national income.
The most worrying aspect confronting heavily debt-ridden countries is the gradual drying up of the sources of financial assistance. This end-of-the-road phenomenon can happen both to bilateral as well as multilateral means and could become extremely frustrating from the loan seeking country. This stage has come for Pakistan as the international lending outfits are showing their reluctance to lend finances to Pakistan along with individual countries, particularly friendly Muslim countries that have also intimated their reluctance in this respect. The glaring example of this attitude is the change in policy of giving money of Saudi Arabia that may be very worrying news for Pakistani financial managers. Saudi Arabia’s finance minister said that the kingdom is changing the way it provides assistance to allies, shifting from previously giving direct grants and deposits unconditionally. He made this statement in the credible surroundings of the World Economic Forum in Davos adding that Saudi Arabia was encouraging countries in the region to enact economic reforms.
The alteration in the Saudi policy is reminiscent of the changing financial fortunes of the oil rich kingdom that has made its new de-facto ruler to beginning economizing on the expenditures of his country. The Saudi minister accordingly gave voice to this change of policy as he emphasised that the kingdom used to give direct grants and deposits without strings attached but now they are working with multilateral institutions to actually point out that they need reforms. He qualified the change in policy by mentioning that the kingdom is taxing its citizens and expects that the countries they provide financial assistance to do their part by streamlining their economic practices. It is reported that Saudi Arabia and other Gulf Arab states like the UAE and Qatar have increasingly moved towards investing rather than extending direct financial aid. In this context, Saudi state media reported the kingdom could boost its investments in Pakistan to $10 billion from $1 billion announced in August, as well as increase the ceiling on deposits into the Pakistan central bank to $5 billion. In June, Saudi Arabia signed deals worth $7.7 billion with Egypt, including to build a $1.5 billion power plant and said it intended to lead investments worth $30 billion, helping a long-standing ally that faces a weakening currency and shortage of foreign currency. The kingdom also set up companies in Egypt, Jordan, Bahrain, Sudan, Iraq and Oman to seek up to $24 billion in investments there.
The Saudi stance is gradually changing though it still appears to be taking due care of its friendly countries such as Pakistan. This attitude was displayed in Saudi policies that after extending the term of a $3 billion deposit to boost Pakistan’s foreign-currency reserves late last year it is also discussing with the World Bank and other institutions how can it be more creative to provide that support to Pakistan. The country pointed out that it is providing even oil and derivatives to support Pakistan’s energy needs adding that Saudi Arabia is open to discussions about trade in currencies other than the US dollar. The world’s largest oil exporter, which has maintained a currency peg to the dollar for decades, is seeking to strengthen its relations with crucial trade partners including China. The kingdom is a pillar of the petrodollar system established in the 1970s that relies on pricing crude exports in the US currency.
In order to financially facilitate Pakistan Saudi Crown Prince Mohammed bin Salman has directed the Saudi Development Fund (SDF) — which provides soft loans and grants to developing countries as a means to bolster allies and cement new relationships — to consider raising the ceiling for Saudi deposits into the SBP as part of measures to support the struggling economy. Many financial experts however mentioned that Saudi Arabia’s intention to boost investments could be a good opportunity but insisted that Pakistan needed immediate dollar inflows to prop up foreign exchange reserves and reduce default risk. Nevertheless, Saudi Arabia’s intention of providing investment options in Pakistan is required to be accepted as for the long term, it would be best to invite the Saudis for investment in a new refinery. Moreover, privatising companies could be another option to get Saudi investments that could make some high-value entities viable with this investment instead of posting deficits for years. It is suggested that Saudi investments could be invited for the agricultural sector since it had a vast opportunity to explore and develop with the latest mechanisation for higher yields. Pakistan’s major crop yields are much below those in developed countries and except for rice, all major crops like wheat, pulses and cotton are much below the potential.
By altering their financial assistance stance it appears that bringing about structural changes in Pakistan’s economy is the way the Saudis are pointing at for the future. This pointer should be the beginning of a painful yet very productive practice of self-reliance that Pakistan abjectly needs and is the actual solution for its economic difficulties. Self-reliance required a balanced economy and political stability and these goals should be earnestly pursued. TW