Growing Saudi-Pakistan relations

Saudi Arabia plans to set up a $10 billion oil refinery in Pakistan’s South Western coast of Baluchistan, said the Saudi energy minister.

The new refinery will be built at Gwadar, the Indian Ocean port that is being developed with the help of China.

Background

The bilateral relationship between Saudi Arabia and Pakistan are historically close and extremely friendly, frequently described by analysts as constituting a special relationship. Despite Pakistan's relationship with Iran and Saudi Arabia's even closer relationship with India, the former has been called "Saudi Arabia's closest Muslim ally."

Saudi Arabia is the largest source of petroleum for Pakistan.  It also supplies extensive financial aid to Pakistan and remittance from Pakistani migrants in Saudi Arabia is also a major source of foreign currency for the country. In recent years, both countries have held high-level talks and developed plans to expand bilateral cooperation in trade, education, real estate, tourism, information technology, communications and agriculture.

Saudi Arabia and Pakistan are leading members of the Organisation of Islamic Cooperation (OIC). Saudi Arabia has also provided extensive religious and educational aid to Pakistan, is a major contributor to the construction of mosques and madrassas (religious schools) across Pakistan, including the Faisal Mosque in Islamabad, named after King Faisal of Saudi Arabia.

Newly elected Pakistani PM Imran Khan inherited a massive imbalance in the government books and has been attracting foreign investments from regional allies such as China, Saudi Arabia and the UAE. Saudi Arabi has been the most helpful so far and has committed upwards of $7 billion in aid to Pakistan.

Analysis

Pakistan wants to attract investment and other financial support to tackle a soaring current account deficit caused partly by rising oil prices. Last year, Saudi Arabia offered Pakistan a $6 billion package that included help to finance crude imports.

“Saudi Arabia wants to make Pakistan’s economic development stable through establishing an oil refinery and partnership with Pakistan in the China Pakistan Economic Corridor,” Saudi Energy Khalid al-Falih told reporters in Gwadar. He said Crown Prince Mohammad bin Salman would visit Pakistan in February to sign the agreement. The minister added that Saudi Arabia would also invest in other sectors.

Beijing has pledged $60 billion as part of the China Pakistan Economic Corridor (CPEC) that involves building power stations, major highways, new and upgraded railways and higher capacity ports, to help turn Pakistan into a major overland route linking western China to the world. “With the setting up of an oil refinery in Gwadar, Saudi Arabia will become an important partner in CPEC,” Pakistan Petroleum Minister Ghulam Sarwar Khan said.

The Saudi news agency SPA earlier reported that Falih met Pakistan’s petroleum minister and Maritime Affairs Minister Ali Zaidi in Gwadar to discuss cooperation in refining, petrochemicals, mining and renewable energy. It said Falih would finalise arrangements ahead of signing memorandums of understanding.

Saudi Arabia is often seen offering its economic resources and the promise of investment in return for military and security cooperation from Pakistan. The partnership with Pakistan satisfies the Saudi historic quest for a close non-Arab ally to maintain its hegemony in the Arab world and deal with its own internal security challenges.

In October 2016, the IMF chief Christine Lagarde confirmed her economic assessment in Islamabad that Pakistan's economy was 'out of crisis'. However, in recent times Pakistan’s economy has been going through a rough patch. Some economic parameters are declining while others remain somewhat stagnant. According to data combined by Bloomberg, the Pakistani rupee was Asia’s worst-performing currency this year.

Since the government of Prime Minister Imran Khan came to power in August, Pakistan has secured economic assistance packages from Saudi Arabia, the United Arab Emirates and China. In November, Pakistan extended talks with the International Monetary Fund as it seeks its 13th bailout since the late 1980s to deal with a looming balance of payments crisis. The Pakistani prime minister’s office had said that Islamabad expected to sign investment agreements with Saudi Arabia and the UAE in the coming weeks.

Assessment

Our assessment is that Saudi’s decision to extend a loan to Pakistan is based on its need to diversify its economic and foreign investments. We believe that the Saudi loan effectively takes Pakistan out of its economic isolation. It shows that Pakistan has friends and it no longer depends on just China for assistance.