Pakistan Eyes $1 Billion Oil Facility from Saudi Arabia Next Year

Pakistan has formally asked its close ally Saudi Arabia to extend the oil facility on deferred payment for another year. The government wants to secure $1 billion worth of oil imports from the Kingdom on credit for the calendar year 2024.

The request comes as Pakistan is preparing to resume talks with the International Monetary Fund (IMF) for the review of its $3 billion Standby Arrangement (SBA) program. The oil facility from Saudi Arabia is part of the financing plan agreed with the IMF to support Pakistan’s balance of payments.

According to sources, Pakistan has made the request to Saudi Arabia through diplomatic channels and is awaiting confirmation from the Kingdom. The modalities, costs, and terms and conditions of the oil facility will be finalized in the next few months.

The existing oil facility from Saudi Arabia will expire in December 2023. Under this facility, Pakistan can import up to $1.2 billion worth of petroleum products from Saudi Arabia on a deferred payment basis for one year. The facility was signed in November 2021 between the Saudi Fund for Development (SFD) and Pakistan’s Economic Affairs Division (EAD).

So far, Pakistan has received $300 million under the oil facility in the first quarter of the current fiscal year (July–September). Since March 2023, when the facility became operational, Pakistan has received a total of $700 million from Saudi Arabia. Another $300 million is expected to be disbursed by the end of December 2023.

The oil facility from Saudi Arabia has helped Pakistan reduce its oil import bill and ease pressure on its foreign exchange reserves. It has also strengthened the bilateral relations between the two countries, which had faced some strains in the past over regional issues.

However, Pakistan may face some challenges in securing another oil facility from Saudi Arabia, as well as from other sources. According to another official, who spoke on condition of anonymity, the Islamic Development Bank (IsDB) has indicated that it may slash its pledged financing for Pakistan’s oil imports under the International Islamic Trade Finance Corporation (ITFC) mechanism.

The IsDB had committed to provide $3.3 billion to Pakistan under the ITFC for three years, starting from 2021. Out of this amount, $1 billion was supposed to be disbursed in the current fiscal year. However, the IsDB has now informed Pakistan that it may only be able to arrange $250–500 million in syndicated loans for oil imports this year.

The IsDB has cited various reasons for its inability to mobilize more funds, such as high interest rates in the international market, low liquidity among Islamic banks, and COVID-19 related challenges. The IsDB’s board will make a final decision on its financing for Pakistan in its meeting scheduled for December 2023.

The official said that this was a negative development for Pakistan, as it would reduce its financing options and increase its borrowing costs. He said that Pakistan would have to look for alternative sources of financing or negotiate with the IMF for more flexibility in its program.

Meanwhile, the Ministry of Finance is gearing up for the upcoming talks with the IMF, which are likely to be held in the first 10 days of November. The exact date and mode of the IMF’s review mission are not yet confirmed.

The finance secretary has convened a meeting of all relevant ministries, divisions, and departments on Thursday to review their progress on meeting the structural benchmarks, indicative criteria, and performance criteria agreed with the IMF for the end of September 2023.

The meeting will also discuss the issues and challenges faced by different sectors in implementing the reforms required by the IMF. The finance ministry will prepare a report based on the meeting and submit it to the IMF before the review talks begin.

Pakistan hopes to complete the first review of its SBA program with the IMF successfully and receive another tranche of $500 million by December 2023. The SBA program was approved by the IMF’s board in March 2023 and aims to support Pakistan’s economic recovery and address its structural vulnerabilities.

Back to top button