Pakistan urges Saudi Arabia not to withdraw deposits given to SBP
Saudi Arabia has withdrawn $3 billion in deposits from Pakistan, according to top officials in Islamabad. Pakistan’s central bank governor Shahid Kardar acknowledged the loss of the money to journalists on Thursday, as Pakistan’s main stock index fell by 8 percent and its rupee fell to an all-time low against the U.S.
This is a diplomatic crisis between Pakistan and Saudi Arabia where Pakistan have pleaded not to withdraw USD 3 Billion from its reserves. Pakistan claims that these reserves are essential for its survival due to plummeting economy. The Finance Minister of Pakistan, Mr. Miftah Ismail has said Saudi Reserves are a big guarantee for Pakistan’s foreign exchange as well as stability of financial system. In his statement Mr. Ismail also mentioned that Saudi Arabian Monetary Agency (SAMA) had given $3 billion worth of deposits to State Bank of Pakistan (SBP) on April 20th 2017. It is one of their biggest deposits ever made by SAMA and it was done after a long period of time. After receiving such huge amount, SBP immediately issued US Dollar certificates to SAMA against these deposits. On Friday, June 9th 2017, Governor State Bank Muhammad Zubair received an official letter from Ministry Of Finance asking him to inform SAMA about withdrawing these funds within 10 days. Pakistani officials believe it will be very harmful if such a huge amount will be withdrawn at once because it can make negative impact on country’s balance sheet as well as currency market.
What is happening?
Even if it’s just for a brief time, one could argue that Pakistan has weaseled its way out of a potential Saudi-lead cutoff of funds by appealing to Riyadh’s national interests. It’s not entirely clear what prompted Pakistan’s request, but some experts told media outlets that it may have been part of an effort to mend ties after Pakistan sided with Iran in a spat between Riyadh and Tehran last year. What are your thoughts on Pak seeking funds from Saudi Arabia? How do you feel about Pakistani leaders doing their best to appease Riyadh? Do you think it will have any lasting effects or is Riyadh likely to pull funding at any moment? Share your thoughts in comments below.
The move comes as relations between Islamabad and Washington continue to improve after they nosedived following revelations over Osama bin Laden’s discovery within Pakistan’s borders. In light of these recent events, which seems more important to Pakistani leaders—mending relations with Saudi Arabia or improving ties with America? Does money speak louder than ideology when it comes to foreign policy? What does Pak stand to gain by appeasing Saudi Arabia? Is it possible that Saudi Arabia might pull funding for other reasons (perhaps due to domestic instability) down the line even if its diplomatic relationship improves with Islamabad?
Is this a new strategy?
Since April, Saudi Arabia has been withdrawing $10 billion to $15 billion every month from Pakistan’s central bank, and last week that pace quickened as concerns grew over how an investigation into a failed anti-terrorism raid on Yemen’s Al Qaeda chief would affect fragile ties between Riyadh and Islamabad. The government has said it is aware of increased foreign exchange outflows from commercial banks and that it is monitoring developments. Some economists are urging authorities to adopt measures to boost foreign currency reserves such as raising interest rates or issuing sovereign bonds. But both steps could dampen growth at a time when domestic demand is already slowing due largely to a new sales tax imposed by Prime Minister Nawaz Sharif’s government. The government needs to act immediately, said Khurram Hussain, director for South Asia at risk consultancy Maplecroft. If they don’t do anything about it now then we will have a balance of payments crisis.
Why did they give those deposits?
There are several reasons why Kingdom of Saudi Arabia might have deposited these big amount of money in Pakistan’s Central Bank. One of them is that Saudis believe Pak’s economy is stable and will last longer than others. The other reason is that as per reports, Kingdom of Saudi Arabia gave such a huge amount of deposit because it wanted Pakistan government help them to increase oil production. In view of all these facts, Pakistan has now appealed Saudis that they should not withdraw those deposits from their currency reserves. This appeal was made by Advisor on Finance Dr Miftah Ismail while addressing a meeting on Tuesday. He said that withdrawing those deposits would create problems for Pakistan’s balance of payments position. He said it would also affect foreign exchange market which can lead to depreciation of rupee against dollar. He further added that withdrawal of $10 billion worth deposits from SBP will create serious problems for Pak’s economy and its reserves position. To avoid such situation, he urged Saudi authorities to reconsider their decision regarding withdrawal of such massive amounts deposited in Pakistani banks.
Why would they take them back?
Such a move could have dangerous financial implications for Pakistan. The country has relied on foreign-currency inflows, including direct investments and deposits from oil-rich countries like Saudi Arabia and China, to shore up its increasingly fragile economy. These inflows are referred to as hot money because of their high sensitivity to global economic and political developments, which can cause them disappear almost overnight. In fact, most economists agree that’s precisely what happened during Pak latest crisis: A sudden drop in foreign currency reserves triggered a sharp selloff of rupee assets that ultimately sent interest rates soaring and pushed Pakistan back into recession. That said, it is unclear why Saudi Arabia would be so keen to take back its deposits at such an opportune time. One possibility is that Riyadh may not be too happy about Pak’s recent overtures toward Iran—which include plans for an upcoming visit by Pak Prime Minister Imran Khan to Tehran. Another possibility is that Saudi Arabia wants to send a message about how serious it is about maintaining pressure on Islamabad over alleged terrorist financing issues—something else Khan will likely discuss during his trip to Iran. Still another theory points out that Saudi Arabia might simply want access to more favorable exchange rates than those available through SBP—although there doesn’t seem to be any evidence supporting such speculation.