by Arif Rafiq
Pakistan’s new government has been in a mad dash to attract foreign aid and investment—most notably from Saudi Arabia—to offset a widening current account deficit, rising foreign debt repayment obligations, and avert a balance of payments crisis. Pakistan’s external financing needs will approach or exceed $30 billion this fiscal year. A return to the International Monetary Fund (IMF)—for the twenty-second time in Pakistan’s history—has been all but certain for much of this year. But Pakistan’s new quarterback, Prime Minister Imran Khan, came late into the game and decided to throw a few Hail Mary passes to his country’s traditional receivers of wish lists, hoping to avoid the fund altogether or pursue a smaller bailout and avoid strict conditionality.
Khan’s first foreign visit since coming into office was to Saudi Arabia. During the visit, his delegation proposed to the Saudis a series of energy and mining investment opportunities. It appears that Islamabad asked Riyadh to park funds close to $10 billion with the State Bank of Pakistan—well before these investments achieve financial close—to shore up Pakistan’s forex reserves in the interim. In this context of Islamabad’s scramble for dollars, Pakistani officials have claimed—and subsequently denied—that Saudi Arabia was invited to join the China-Pakistan Economic Corridor (CPEC) as a “strategic partner.”
Time has now run out for Pakistan. And on October 4, after Pakistan’s main stock exchange index declined for the sixth consecutive day, the finance ministry finally announced that it intended to begin formal talks with the IMF for a bailout. But discussions between Islamabad and Riyadh on investments, including projects related to CPEC, will continue. For both sides, these potential investments have economic and strategic value, but they are also fraught with risk—both legal and geopolitical.
Potential Risks and Rewards of Saudi Investment in Pakistan
Pakistan has floated five sets of potential investments to Saudi Arabia. These include the Reko Diq copper and gold mine in Balochistan, valued in the hundreds of billions of dollars. In 2017, Pakistan lost an international arbitration case to the Tethyan Copper Company, which held an exploration license for Reko Diq, but was denied a mining lease by the Balochistan provincial government in 2011. The tribunal is expected to determine Pakistan’s liability this year. The figure could exceed $11 billion.
Should the project move forward, the new concession holder would likely provide Pakistan with the funds to pay the penalty, which—depending on its size—could result in a major cut to Pakistan’s royalties. On top of the financial and legal risks, the mine is located less than one hundred miles from Pakistan’s border with Iran.
Reko Diq would certainly be a target for insurgent violence, though the Pakistani state is equipped to reduce physical risk with the right mix of political and security measures.
Resource nationalism is a driver of the ethnic Baloch insurgency, but it also receives support from regional states.
In August, a suicide bomber with the Balochistan Liberation Army attacked a convoy transporting Chinese engineers to the Saindak copper and gold mine, leased by the Metallurgical Corporation of China. The attacker used an Iranian vehicle. Militants with several Baloch separatist groups combatting the Pakistani state are believed to be in Afghanistan or Iran. Projects linked to the Saudis would become targets in the same way Chinese projects have been over the past fifteen years.
Before moving forward with extractive projects in the province, Islamabad must factor in geopolitical risk. And it should develop an inclusive and redistributive economic framework that results in a share of the earnings going directly into the hands of local citizens.
The second set of projects includes two government-owned operational regasified liquified natural gas-fueled power plants in the Punjab province. Riyadh reportedly expressed interested in purchasing equity in the plants on a government-to-government basis, but that may not be legally possible. Instead, a Saudi power company, ACWA Power, could take part in open bidding for the plants. Sale of the plants could earn Islamabad much-needed cash, but there are geopolitical complications tied to that sale too. These power plants are fueled by liquified natural gas (LNG) from Qatar. Sale of the plants to a Saudi public or private entity would likely require an alternate source of LNG and could even impact Pakistan’s fifteen-year LNG supply contract with Qatar.
The third potential Saudi investment in Pakistan is a Saudi Aramco refinery in Gwadar, the site of a Chinese-operated port and industrial zone. Like the Reko Diq mine, Gwadar is located close to the border with Iran. Gwadar is a competitor to Iran’s Chabahar port, where India will operate a terminal that will be used to bypass Pakistan to access Afghanistan and Central Asia. It is an end node for the China-Pakistan Economic Corridor, which begins in Kashgar, located in China’s Xinjiang region.
Economic activity and investment in Gwadar have progressed tepidly when compared to other regional upstarts like Duqm in Oman and Khalifa Port in Abu Dhabi, which have received significant inflows from China, with the potential to exceed $10 billion. Investment from a global energy giant like Saudi Aramco would catalyze other investments and boost port activity. A refinery in Gwadar would give the Saudis an economic foothold in a strategic location—just outside the Strait of Hormuz but close to Persian Gulf shipping lanes—and could lock Pakistan.
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