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Can Pakistan escape the Saudi debt trap?

Mo strings attached: Can Pakistan escape the Saudi debt trap?
6 min read

Syed Fazl-e-Haider

22 December, 2021
With a $4.2 billion loan deal, Saudi Arabia wins back Pakistan after concerns it could have join Turkey's rival bloc. But Riyadh has a track record of using loans to strong-arm Islamabad in regional politics, writes Syed Fazl-e-Haider.
Pakistan's Prime Minister Imran Khan meets with Crown Prince of Saudi Arabia Mohammed bin Salman Riyadh on October 25, 2021. [Getty]

Even if beggars could be choosers,  they would not choose to enter into the loan deal signed by the cash-strapped Pakistan with Saudi Arabia in November. While the deal meets the pressing financial needs of the South Asian country, it serves multiple interests, from financial to geopolitical, of the lending power.   

On November 29, Pakistan's central bank and the Saudi Fund for Development (SFD) signed a $4.2 billion deal under which Riyadh will provide $3 billion in safe deposits and $1.2 billion worth of oil supplies on deferred payments to Islamabad.

Under the deal, Riyadh can ask Islamabad to return the money in case of sovereign default with just 72-hour notice, with or without providing a reason. Without any rollover option, the loan will have to be returned by Pakistan after one year. 

The Saudi loan package comes with tougher conditionalities, which would be harder to meet for the country whose foreign exchange reserves are rapidly dwindling, as the rupee depreciates against the US dollar and the current account deficit deteriorates. Has Saudi Arabia financially trapped Pakistan? When and how Riyadh might ask Islamabad to return the money?  

Just a year ago, Saudi  Arabia asked Islamabad for a premature return of a portion of the $6.2 billion loan it had given to Pakistan in 2018. This was a political move: Pakistan's foreign minister Shah Mehmood Qureshi had lambasted the Saudi Arabia-led Organisation of Islamic Cooperation (OIC) for its inaction over Kashmir, a disputed territory between India and Pakistan, and threatened to form another Muslim bloc along with Turkey, Iran and Malaysia.

This angered Riyadh, which immediately asked Islamabad for the return of money. China, Pakistan's all-weather friend, came to Islamabad's rescue and the country returned $1 billion immediately to Saudi Arabia in May 2020.  

Saudi Arabia has a track record of using its loan as a political tool to strong-arm Islamabad into behaving as Riyadh wants in regional politics or the politics of Muslim countries. In December 2019, Saudi Arabia pressured Pakistan to pull out of a Kuala Lumpur summit of Muslim leaders, including Turkish President Recep Tayyip Erdoğan, hosted by Malaysia.

Saudi Arabia had threatened to to withdraw its $3 billion from Pakistan’s central bank if it participated in the summit, which was held, according to Riyadh, to coin the idea of a new Muslim bloc rivalling the 57-member OIC. The most recent loan deal does not mark a thaw in Saudi-Pakistan relations, but a renewed political tool in Saudi hands against Pakistan. 

Pakistan, the only nuclear power in the Muslim world, has been a long-time ally of Saudi Arabia. However, the dispute over Kashmir has caused recent tension between the two nations, pushing Pakistan closer to Turkey.

Since the abolition of special autonomous status of Kashmir in August 2019 by Indian Prime minister Narendra Modi’s government, Pakistan became frustrated with the OIC, as it merely rendered lip service to Kashmir, which has been the cornerstone of Pakistan's foreign policy.

On the other hand, Turkey has strongly supported Pakistan's stand on Kashmir, and President Erdogan has raised the Kashmir dispute at international fora, vehemently condemning India's annexation of Muslim majority region. Despite not leading any Islamic bloc, Turkey has been at the forefront of international conversations, raising issues and problems the Muslim countries are facing today.

But Riyadh does not want Islamabad to be the part of the game being played by Iran, Turkey and Malaysia to divide Muslim world by creating new bloc to rival OIC.

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Just a year ago, Pakistan was all set to choose Turkey as its strategic partner at the cost of its decades-old friendship with Saudi Arabia. With the help of China, the cash-strapped country had managed to return the Saudi loan in order to make an independent decision in this regard.  Saudi-Pakistan relations, however, improved in the beginning of 2021, thanks to high level talks between the two sides. Saudi Arabia did not withdraw its remaining $1 billion out of the $3 billion loan it extended to Pakistan in 2018. 

Saudi Arabia and Turkey have been at loggerheads over leadership of the Muslim world. Riyad sees Ankara a threat to its leadership status. Saudi Arabia-Turkey relations deteriorated in 2018 when the Washington Post columnist Jamal Khashoggi was brutally murdered in the Saudi consulate in Istanbul.  

By extending a fresh loan facility to Islamabad,  Riyadh has killed three birds with one stone. Riyadh can once again resort to arm-twisting Islamabad if Pakistan decides to join any new bloc other than the OIC. It has strengthened its ties with the South Asian country that could be a bridge between Riyadh and Beijing following the shift in US Middle East policy under President Joe Biden's administration. Finally, it has put a brake on the flourishing of a Turkey-Pakistan romance. 

Saudi Arabia will always be wary of attempts to usurp its leadership status in the Muslim world. Riyadh's main concern is the creation of a new Islamic bloc, which it sees as an attempt to divide the Muslim world.

Merely tightening its squeeze on Pakistan cannot secure its leadership status among OIC nations. It needs to initiate a reorganisation of the OIC, making it a more active and stronger organisation to protect the strategic interests of Muslims. It needs to address the grievances of the member countries.  

Presently, Pakistan is at a crossroads. It either has to resolve its perennial economic problems or continue to have its foreign policy decisions dictated by lending countries like Saudi Arabia.

If Pakistan drifts away from Saudi Arabia, it will join Turkey, Malaysia and Iran. Joining Turkey would mean a step toward a new Islamic bloc to contain Saudi's influence in the Muslim world. It will have to bear huge economic costs if it distances from Riyadh.

All this could happen next year if Saudi Arabia continues to resort to Pakistan's arm-twisting on issues related to the Islamic world.

Syed Fazl-e-Haider is a contributing analyst at South Asia desk of Wikistrat. He is a freelance columnist and the author of several books including ‘Economic Development of Balochistan’.

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Opinions expressed here are the author's own, and do not necessarily reflect those of her employer, or of The New Arab and its editorial board or staff.

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