Saudi lifeline eases Pakistan’s funding strain

Saudi Arabia has pledged an additional $3 billion in support for Pakistan and agreed to extend a $5 billion deposit for a longer period, giving Islamabad fresh breathing space as it works to manage external financing pressures and a looming $3.5 billion repayment obligation to the United Arab Emirates this month. Pakistan’s finance minister, Muhammad Aurangzeb, disclosed the support in Washington, and the arrangement was confirmed by reporting that cited both countries’ finance ministries.

The announcement matters because Pakistan’s foreign exchange position, while improved from the depths of its balance-of-payments crisis, remains tight. State Bank of Pakistan data showed official reserves at about $16.4 billion at the end of March, while total liquid foreign reserves held by the country were about $21.8 billion. Against that backdrop, a $3.5 billion repayment to the UAE represents a material drain on central bank reserves and risks complicating Islamabad’s effort to keep its International Monetary Fund programme on track.

Aurangzeb had already signalled that all financing options were under consideration, including Eurobonds, sukuk, commercial borrowing and bilateral support, after the UAE facility was due to expire this month. He also said Pakistan was pursuing a first Panda bond worth about $250 million, backed by the Asian Development Bank and the Asian Infrastructure Investment Bank, as part of a broader attempt to diversify funding sources rather than rely solely on traditional bilateral deposits.

For Pakistan, the Saudi package does more than add dollars to the books. It strengthens confidence around the country’s near-term external payments profile at a moment when the IMF programme remains the anchor of economic policy. Reuters reported that under the $7 billion, 37-month IMF facility agreed in 2024, Pakistan is aiming to push reserves above $18 billion by June. That target had looked harder to meet if the UAE exposure had not been refinanced or offset by fresh inflows from partners.

Saudi Arabia’s role is also consistent with a longer pattern. Riyadh has repeatedly stepped in with deposits, oil support and rollover arrangements when Pakistan’s external accounts have come under strain. Reuters reported in 2022 that Saudi Arabia extended the term of a $3 billion deposit placed with Pakistan’s central bank, and in December 2024 it again prolonged the term of a $3 billion deposit for another year. The new commitment suggests that support is not merely being rolled over mechanically but is being expanded in response to a sharper funding need.

Yet the Saudi move does not remove the structural questions hanging over Pakistan’s economy. IMF support has helped stabilise the macro picture, inflation has eased from crisis levels, and officials have projected growth of close to 4% this fiscal year along with remittances of about $41.5 billion. Even so, the underlying challenge remains familiar: Pakistan must keep rebuilding reserves, improve tax collection, manage energy-sector liabilities and reduce its dependence on ad hoc external rescues. Aurangzeb himself has pointed to the need for a strategic petroleum reserve and a greater shift towards renewable energy to reduce vulnerability to geopolitical shocks.

Broader politics also form part of the picture. Saudi-Pakistan ties have deepened beyond finance, with both countries strengthening defence cooperation over the past year. Reuters reported that Pakistan and Saudi Arabia signed a mutual defence pact last year, and Pakistan has played a wider diplomatic and military role in the region as tensions around Iran, Gulf security and energy supply routes have intensified. Prime Minister Shehbaz Sharif’s visit to Saudi Arabia this week underlines that the economic relationship cannot be separated from the strategic one.

There is also a distinction worth making between deposits and long-promised investment. Saudi officials and Pakistan’s government have for some time discussed a $5 billion investment package, including potential projects in mining, agriculture and other sectors. Those plans are important for Islamabad because they would create longer-term productive inflows rather than simply support reserves. But investment has moved more slowly than emergency financing, which is why deposit extensions and fresh bilateral backing still carry outsized weight in Pakistan’s immediate economic management.