You can bet that somebody in the Saudi Fund for Development (SFD) had a good laugh at the way the Pakistani stock market rejoiced at the delayed formalisation of the $4.2 billion cash and oil facility. The financial, political as well as or-else conditions associated with it make it just about the most expensive loan on the market. And financial markets tend to price in all the negatives to see how much is left to celebrate. Therefore, the Karachi Stock Exchange’s (KSE’s) euphoric 1,215.89 point (2.68 percent) jump at the news of the loan on Monday, after dropping four out of five trading days last week and losing 2,553.66 points (5.49 percent), would have impressed upon the custodians of the holy sites, and now also of the financial health of the Ummah’s only nuclear power, just how desperate for cash, and for oil, Islamabad has become.
The first thing that strikes as a little odd about the whole thing is that the government thought it was a good idea to keep its cards so close to the chest. You only do that when you have something to hide, as it was in this case, but that doesn’t work with the market because it eventually gets to know. Plus, Shaukat Tarin has a grey hair or two so he should’ve known that keeping mum about such details causes unnecessary confusion, which only serves to spook not calm financial markets.
The other great surprise was Shaukat assuring everybody, at a press conference, that the loan would carry an interest rate of 3.2 percent, just like last time, but it turned out to be an unprecedented four percent. And nobody’s yet taken the trouble to explain whether the finance advisor didn’t get it right or the Saudis changed the terms. Or if any terms had been finalised at all in the rush to fire celebratory tweets after shaking hands in Riyadh? The implicants, in either case, are very serious; so this definitely needs to be explained.
Such lapses also raise the question of whether other conditions were worked out in or before going to Riyadh in October, like the 72-hour notice, foreign policy implications, etc., or if the government got to know about them in the nine o’ clock news as well. What can be definitively quantified about the loan so far is that it’s not a rollover facility like the previous one - which was still revoked half-way - there’s a much higher interest rate than the previous Saudi facility or the IMF (International Monetary Fund) bailout loan, it can be recalled on a 72-hour notice, especially if Islamabad makes friends of countries that Riyadh doesn’t approve of, and that the government of Pakistan can keep the money in SBP’s (State Bank of Pakistan’s) vaults to make reserves look pretty, but it can’t touch a penny of it. It is, according to a phrase still widely used in financial markets, strictly to put lipstick on the pig.
There’s also the little detail about adjudication of possible disputes in accordance with Saudi law. Considering that the previous loan was cancelled midway, and that the sword of a 72-hour notice hangs over this one, you can be sure that the al Saud will give the whole thing the chop if compliance is not up to their expectations. And the government is still not telling if this loan is contingent upon a green light from the IMF as well. They’ve reached a staff level agreement alright but nothing is certain till the executive board okays it on January 12, before which a mini budget as well as the SBP (State Bank of Pakistan) amendment bill have to be rushed through the House. That means shoving an additional Rs270-odd billion in tax revenue, scrapping Rs350 billion worth of tax exemptions, flat 17 percent sales tax rate, etc., down everybody’s throat, after promising not to do any of those things, to get $1 billion more of aid money.
If it’s the weakness of the current account and inability to control inflation that sent the government borrowing from the Saudis again, despite the snub last time, then there isn’t likely to be much to celebrate down the road. While these loans will give about as much breathing space as additional debt component of reserves can be expected to, they are not very likely to do the current account or consumer price index any good whatsoever. And at the end of the day there’ll only be more to pay back, and that too at a higher interest rate than before.
The finance ministry’s gratitude for Saudi help “in our hour of need” and “brotherly relations” and all that completely misses the point, perhaps deliberately so, that Saudi petrodollar outreach is the bedrock of its obsession with spreading its tentacles, and its influence, as far and wide as possible; it’s fabled Riyal Politik. PM Imran Khan got a personal taste of it early on when his big plans of countering Islamophobia internationally by opening a TV channel in partnership with Malaysia and Turkey bit the dust just because Crown Prince Mohammed bin Salman didn’t allow him to attend the much-hyped follow-up summit with Mahathir and Erdogan.
Now he’ll have to be more careful than usual about the kind of foreign policy statements he makes or the kind of countries he tries to do business or fight Islamophobia with. For if the Saudi royalty doesn’t like how he bats the petrodollars will make a quick electronic journey back to the central bank of black gold and the slightest wind will cause the Pakistani economy’s house of cards, and the financial market along with it, fall all over itself.
Copyright Business Recorder, 2021
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