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CWA # 62, 30 October 2018

Pakistan
The Economic Crisis and the Saudi Investments: What are the Fallouts?

  Divyabharathi E

Will Pakistan rely on China and IMF to solve its balance of payment crisis? Will Pakistan resort to Saudi investment as the best option? What would Saudi gain out of the deal? Will China encourage this arrangement? Would US brokered Saudi investment in Pakistan serve US’s interests in the region?

Divyabharathi is pursuing MA in International Studies at Stella Maris College, Chennai

Pakistan is facing an economic crisis. China, the International Monetary Fund and Saudi Arabia have offered to lend Pakistan the funds it so desperately needs.

Will Pakistan rely on China and IMF to solve its balance of payment crisis? Will Pakistan resort to Saudi investment as the best option? What would Saudi gain out of the deal? Will China encourage this arrangement? Would a US-brokered Saudi investment in Pakistan serve US’s interests in the region?

In late September, Pakistani Prime Minister Imran Khan reported that Riyadh had concurred to contribute within the CPEC. Khan strolled back the articulation on Oct. 3, saying the kingdom would not join the project. Still, he made it clear that bounty of venture opportunities, including infrastructure related to but not actually portion of the CPEC, remained accessible to Saudi Arabia in his nation. 

Saudi Investment: Breathing Space for Islamabad

Choosing between an IMF and a Chinese loan is tricky. On the one hand, taking cash from China would increase Islamabad’s dependence on and obligation to Beijing. China is infamous for its propensity to raise interest rates when borrowers come back asking for more.

On the other, a loan from IMF would likely involve more transparency on Pakistan’s part, for instance over its debt deals with China. Beijing may be critical of this, which in turn may harm Islamabad’s relations with its all-weather friend. It could indeed incite domestic backfire if the Pakistani public found the CPEC deals’ terms more favorable to China.

Despite these dangers and reluctance from the IMF’s first-largest vote-holder, US, to perpetrate through loan – Khan endorsed arrangements on 10 October with the global lender. Islamabad has moreover acknowledged some smaller loans from China to keep it afloat meanwhile.

Help from Saudi Arabia would deliver Pakistan a small breathing space. The planned agreement between them is acceptable to incorporate a $2 billion bridge loan, alongside a bargain for Pakistan to purchase between 110,000 barrels per day and 200,000 bpd of unrefined oil from the kingdom on 90 days’ credit, a generous arrangement. The deferred payments plan would be particularly imperative to Pakistan since it would empower Islamabad to stem foreign reserves surges without confining its access to oil imports.

 

So, what would be Saudi demands?

Not only reducing Iran’s exports but also Saudi could ask Pakistan to break its neutrality in the Yemeni civil war and lend support to the coalition fight against the Houthis, whom Iran sponsors. An implied investment in a new oil refinery at the Gwadar port guarantees to abdicate a 16 per cent return for the kingdom. The deal would bear Saudi Arabia get access between 14.5 million and 22 million barrels' worth of capacity space where it could house its oil without having to stress around a potential Iranian barricade at the Strait of Hormuz. That way, it could ensure a more solid supply of oil to its Asian clients.

Beyond the economic implications, the Saudi investment in Pakistan would also have geostrategic and security ramifications for Iran. If Saudi Arabia demands greater military cooperation from Pakistan in return for its assistance, the kingdom could turn the tables on Iran and threaten its access to the ocean. Just as Tehran has threatened Saudi Arabia’s southern border by supporting Yemen’s Houthi rebels, Riyadh could menace Iran’s eastern border by backing the Sunni insurgents in Sistan and Baluchestan.

 

A Varied Sack for China

Beijing would welcome more secure access to Saudi oil, but it would disfavour other perspectives of Riyadh’s association in Pakistan. If Saudi Arabia contributes in infrastructure projects outside the CPEC that are in any case indispensable to the project, such as the refinery, it'll weaken China’s control over the transport course, especially at the entrance. And for China, control is key. The objective of the CPEC is to provide alternative supply routes so that it can bypass chokepoints such as the Malacca Strait in transporting its products overseas. The passage from China through northeast Pakistan to Gwadar port is one such course. Saudi Arabia’s interest, in any case, would present a component of vulnerability to China’s control over Gwadar, and over the CPEC as an entirety, since a deal with Riyadh would pressure on Islamabad to heed Beijing’s demands.

China’s concerns regardless, Saudi Arabia and Pakistan are moving forward with a deal. Pakistani media have detailed, citing anonymous authorities that agents from the two nations are working to finalize MOUs. To console Beijing of Islamabad’s commitment to  CPEC, the Pakistani Armed force chief gone to China in September and had a private audience with President Xi Jinping.

 

The US Gains

If China is wary of the deal, USA is more enthusiastic. The US has an interest in reducing Pakistan’s reliance on Beijing. For one thing, China’s developing presence within the Indian Ocean puts India, a rising partner in Washington’s endeavours to contain Chinese development. For another, Washington needs to preserve sufficient influence with Islamabad to encourage its endeavours at ousting jihadist organizations working in Pakistan. The more Pakistan depends on it or its partners, the more successful the U.S. can be in this endeavour. Overall, the US’ objective for Pakistan is to keep the nation steady and avoid its atomic weapons from falling into the wrong hands.

That Saudi Arabia’s deal with Pakistan would put weight on Iran is an added reward for Washington. Given the choice, China will pick to purchase Saudi oil, instead of bringing in Iranian oil that must travel chokepoints because it crosses the Indian Ocean. 

To conclude, the US would barely be the agreement’s only beneficiary. The imminent deal, of course, will offer assistance Pakistan, as well, bringing in more cash to offset its developing debt payments and maybe empowering it to draw in more foreign currency through refined oil trades. Saudi Arabia stands to gain a large oil storage facility favourable to its Asian customers and a cut of whatever benefits the new refinery at Gwadar creates. It could also secure Pakistan’s military help within the Yemeni civil war if it requests of Islamabad, and in case the Pakistani government concurs. 

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