Paying loans with loans

That Saudi Arabia has replaced the UAE deposit does not bode well

That the UAE switched from an annual to a monthly rollover for its $3.5 billion deposit with the State Bank of Pakistan, which was functionally a loan, led the Pakistan government to do something it din’t really want to do, which was repay the deposit. There was a certain amount of posturing about how Pakistan could make the repayment because of the strength of its foreign exchange reserves,  but that has not stopped the country from obtaining a $3 billion deposit from Saudi Arabia, to add to the $5  billion it has gradually deposited, and which is being rolled over. Considering that Pakistan’s forex reserves were $16.4  billion, this means that close to half of them, $8 billion, consist of Saudi deposits. That the deposit is essentially geopolitical in nature becomes clear from two things.

First, the visit of Pakistani Prime Minister Shehbaz Sharif to Saudi Arabia in connection with the initiative for US-Iran talks in Pakistan over their conflict. Apart from the fresh deposit, both depend on the Strait of Hormuz, Saudi Arabia to export oil, and Pakistan to import it. Second, the going over to Saudi Arabia of a Pakistan Air Force contingent, both in the context of the conflict, and of the Strategic Defence Mutual Agreement between the two. It must be remembered that the UAE and Saudi deposits were both factors in Pakistan being granted an IMF package. The rollover of these deposits was considered important to the giving of that package, and for precisely the reason that repaying the UAE deposit was so important: because it was a charge on the forex reserves.

Pakistan has just learnt why such deposits, while they might have some emergency value, are not a long-term solution. These deposits are not meant to be touched, and while they are counted as part of the country’s forex reserves, are not supposed to be used to pay for imports or service debt. It cannot be satisfactory to have half of the country’s reserves not liable to being drawn down. A resulting development, also a temporary adhoc measure, is that the government is throwing out of the window all its rhetoric about this being the last IMF package, not  by asking for a new package, but an increase, and thus an extension, in the current package. The US-Israel-Iran war is the pretext,  but the reason is Pakistan’s forex woes.