Summary

Saudi financing boosts Pakistan’s forex reserves.

Pakistan’s economy shows signs of stabilization.

IMF deal expected to unlock additional external financing.

Pakistani dollar bonds rally following Saudi contribution.

Article

ISLAMABAD, July 11 (Reuters) – Pakistan has received $2 billion in financial support from Saudi Arabia, announced Finance Minister Ishaq Dar on Tuesday. The timing is crucial as it comes a day before the International Monetary Fund’s board is expected to grant final approval for a much-needed $3 billion bailout.

The funds have been deposited by Saudi Arabia into Pakistan’s central bank, bolstering the country’s foreign exchange reserves. Prior to this contribution, Pakistan’s reserves were insufficient to cover even a month of controlled imports.

In a recorded video statement, Dar expressed gratitude to Saudi Arabia on behalf of the prime minister and army chief, terming it a “great gesture” from the longtime ally. The pledge to provide financial support was made by the Middle Eastern country in April, but the actual deposit was delayed until assurance of the IMF bailout was obtained.

Prime Minister Shehbaz Sharif commented on the development, stating, “It reflects the growing confidence of our brotherly countries and the international community in Pakistan’s economic turnaround.”

Having narrowly escaped a sovereign debt default, Pakistan secured the $3 billion IMF bailout at the end of June. The approval of the IMF board, scheduled for Wednesday, is still pending.

Under the nine-month arrangement, Pakistan will immediately receive approximately $1.1 billion, with the remaining amount to be disbursed in staggered installments by the IMF.

The IMF deal is expected to unlock additional bilateral and multilateral financing, in addition to the funds provided by Saudi Arabia. Finance Minister Dar anticipates that Pakistan’s foreign exchange reserves will rise to $15 billion by the end of this month.

The recent bailout has already had a positive impact, as credit rating agency Fitch upgraded Pakistan’s sovereign rating to CCC from CCC-. This has brought relief to investors in the country’s stocks and bonds.

Following the announcement of Saudi Arabia’s financial assistance, Pakistan’s sovereign dollar bonds experienced a significant rally. Tradeweb data indicates that the bonds rose by as much as 1.8 cents on Tuesday.

The shorter-dated bonds showed the most substantial gains, with the 2024 issue reaching 77.75 cents on the dollar. This marks an increase of almost 30 cents from the lows experienced in late June.

Pakistan’s bonds have seen remarkable improvement since securing the IMF deal, offering hope to the heavily indebted nation.

However, to fulfill the IMF’s requirements, Sharif’s coalition government, which is set to face a national election later this year, must implement further challenging fiscal discipline measures. The central bank has already raised its policy interest rate to a record high of 22%, while ordinary Pakistanis continue to grapple with an inflation rate of around 29%.