Saudi Arabia provides $2 billion support to Pakistan's weak economy

Finance Minister Ishaq Dar announced on Tuesday that Saudi Arabia provided a boost of support to Pakistan's struggling economy. Saudi Arabia has provided $2 billion in financial assistance to Pakistan, which comes at a crucial time as the International Monetary Fund's board is expected to approve a much-needed $3 billion bailout.

Minister Dar disclosed that the funds have been successfully deposited into Pakistan's central bank, resulting in a bolstering of the country's foreign exchange reserves. This financial assistance from Saudi Arabia comes at a critical juncture when Pakistan's reserves were inadequate to cover a month's worth of restricted imports.

Saudi Arabia had committed to providing the funds back in April but waited until the assurance of an IMF rescue package, given Pakistan's ongoing debt and economic crises, before depositing the funds with the State Bank of Pakistan.

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In the closing days of June, Pakistan, facing the imminent risk of a sovereign debt default, secured a crucial $3 billion IMF rescue package. However, the loan still awaits approval from the IMF board, which is scheduled to convene on Wednesday. The IMF will gradually distribute the remaining funds under the nine-month agreement, with Pakistan receiving an initial disbursement of approximately $1.1 billion.

The agreement with the IMF is expected to pave the way for additional financial support through bilateral and multilateral channels, in addition to the assistance provided by Saudi Arabia. Finance Minister Dar expressed his optimism, stating that Pakistan's foreign exchange reserves are anticipated to reach $15 billion by the end of this month.

Pakistan is grappling with economic issues.

Pakistan's economy, valued at $350 billion, is currently facing severe challenges, as it grapples with a staggering inflation rate of 38%. Over the past year, the government has implemented stringent measures to prevent default, as the country contends with a rapidly depreciating currency and a mounting external deficit.

During the current fiscal year, Pakistan's industrial sectors, which are vital for the country's economy, have witnessed a decline of around 3%. This decline has raised substantial concerns in a nation with a population of 230 million, where more than 2 million individuals enter the labor market each year. As a result, this setback in growth and employment opportunities has led to an increase in migration, posing a significant obstacle for Pakistan to overcome.

Reuters cited Hafeez Pasha, a renowned economist and former finance minister of Pakistan, who provided an estimate of the country's unemployment rate as "11–12 percent, conservatively." It is worth noting that official unemployment figures have not been released for over two years, leaving a gap in the current understanding of the employment situation in Pakistan.

Pakistan's fiscal deficit for fiscal year 2024 is expected to amount to 6.5% of the country's GDP. In preparation for the IMF meeting, Pakistan has revised its budget and implemented new measures aimed at reducing the deficit. However, specific figures regarding the extent of the deficit reduction were not provided by the finance minister.

Pakistan's improving credit rating

On Monday, Fitch Ratings upgraded Pakistan's long-term foreign currency issuer default rating from CCC- to CCC, providing a sense of relief to investors in the country's stocks and bonds. This improvement in the rating serves as a positive sign for Pakistan, which has been grappling with its most severe economic crisis.

Following Pakistan's agreement with the IMF, the country's bonds have experienced a significant surge in value. According to Tradeweb statistics, the sovereign dollar bonds witnessed a remarkable increase of up to 1.8 cents on Tuesday, following the disclosure of Saudi assistance. Shorter-dated bonds demonstrated the most substantial gains, with the 2024 issue rising to 77.75 cents on the dollar, marking an increase of over 30 cents from its late-June lows. This upward trend reflects growing investor confidence and optimism in Pakistan's financial outlook.

The recent upgrade in the country's rating reflects Pakistan's improved external liquidity and funding conditions, attributed to the staff level agreement reached with the International Monetary Fund (IMF). However, it also highlights the cautionary note that the budget deficit still remains significant. This development signifies a positive step for Pakistan's economic stability, while acknowledging the need for continued efforts to address the budget deficit.