Shaukat Tarin, Pakistan’s adviser to the Prime Minister on Finance and Revenue, today confirmed the South Asian nation has received a US$3 billion loan from Saudi Arabia.
The loan is part of a support package signed between the two countries in November, which also included included a $1.2 billion oil loan facility.
“Good news, US$3 billion Saudi deposit received by SBP,” Tarin tweeted earlier today.
“I want to thank His Excellency Crown Prince Mohammed Bin Salman and Kingdom of Saudi Arabia for the kind gesture.”
The $3 billion will be added to State Bank of Pakistan reserves. The loan is expected to be repaid in one year and comes with a 4% interest rate.
Pakistan grapples with high inflation
Record levels of inflation is causing both social unrest and severe strain in Pakistan’s economy.
In November, inflation reached a decade high of 11.5%, up from 9.2% from October. In most areas the price of sugar is now higher than the price of oil.
Along with this, the country’s trade deficit has hit a record $4.85 billion and the Pakistani rupee has declined more than 9% against the USD in 2021.
In addition to personally negotiating the Saudi support package, under-pressure Prime Minister Imran Khan, has also revived a $6 billion funding program from the International Monetary Fund.
In so-far futile attempts to rein in inflation, Pakistan has raised its benchmark interest rate by 150 basis points to 8.75%. Another rate hike is expected when the State Bank of Pakistan next meets on December 14.
The Pakistan Government expects to post economic growth of around 5% during this fiscal year which ends June 30, 2022.
“As a result of stronger than expected growth, the current account deficit has widened moderately more than we had anticipated,” said Pakistan Central Bank governor Reza Baqir in an interview with CNBC.
“That weakening of the current account deficit, and a couple of other factors, has put undue pressure on the exchange rate and the monetary policy committee – being concerned about the lag effect of exchange rate developments on inflation – thought it was time to begin to moderate monetary stimulus a bit faster that we had earlier anticipated.
“Pakistan has a coordinated approach to bringing down inflation and we must realise that when inflation runs high it particularly erodes the spending power of lower income households and therefore it is imperative to take any and all actions to bring it down.
“One part of inflation is due to food supply issues and there the Government has a very proactive and coordinated stance to try to relieve supply bottlenecks so that produce gets from the farms to the markets in a timely manner, and also to ensure that there is no hoarding or speculation in the prices of basic commodities.
“Second, you know one factor of inflation isn’t national commodities prices. Unfortunately there’s not much emerging markets can do on that front, because not passing through international oil prices, for instance, just leads to a buildup of imbalances whether on the fiscal side or on the external side.
“Where we can do something… Is to moderate domestic demand so that inflation expectations and demand-side factors do not add to the supply-side factors that already exists.”
Pakistan has also increased the cash reserve requirement for banks to 6% in a move aimed at containing monetary expansion.
The cash reserve requirement is the amount of money banks must keep with the central bank. It is applicable to on-demand liabilities and time liabilities with tenors of less than a year.