Pakistan’s less-than-four-month-old government is pursuing a two-track approach to stabilize the country’s long-troubled economy. It is engaged in lengthy negotiations with the International Monetary Fund (IMF) to secure at least $6 billion in loans to shore up its ability to service its external debt. At the same time, Islamabad is also trying to woo its Gulf allies, most notably Saudi Arabia and the United Arab Emirates, in a bid to diversify its sources of external financing, address the lingering threat of insolvency, and put its economy on an upward trajectory of sustainable growth.
The United States used to be the most significant source of foreign direct investment (FDI) and bilateral aid to Pakistan. However, China has ramped up its investments in the country over the past decade or so, primarily in the form of loans rather than grants. Beijing stepped in to address Islamabad’s energy and infrastructure needs at a time when Pakistan was experiencing waning American and multilateral support. The fact that China has now become Pakistan’s largest bilateral creditor is a source of consternation not only for the US but also for Pakistan itself. America remains suspicious of the Chinese use of debt to increase its leverage across the Global South, and Pakistani policymakers are wary of placing all their eggs in one basket. Trying to improve their ties with the US without impairing their growing relations with China is a tough balancing act to maintain in this era of growing great power competition, not only for Pakistan but also for many other middle powers. It is within this broader context that Pakistan’s new prime minister, Shehbaz Sharif, is looking to diversify the country’s options by trying to bolster economic ties with Saudi Arabia and the UAE.
Historical context of Pakistan’s relations with Saudi Arabia and the UAE
Riyadh and Abu Dhabi have long been allies of Islamabad, and over the years they have come to its aid at critical times to help keep its economy afloat. While Emirati aid has been more modest in comparison, Saudi support has been substantial, especially during difficult periods, including, for instance, Pakistan’s wars with India in 1965 and 1971. Saudi Arabia also provided Pakistan a financial lifeline after it declared itself a nuclear power in 1998. On the heels of India’s nuclear tests, Pakistan had faced immense international pressure and threats of sanctions to try to dissuade it from testing its own weapon. The Saudis have continued offering deferred oil financing facilities to Pakistan in more recent years as well. In addition, the UAE, alongside China and Saudi Arabia, has helped roll over billions of dollars of loans to Pakistan to avert bankruptcy.
The relationship between Pakistan and the Gulf states extends well beyond financial support to include trade, investment, and labor ties. The UAE has become the second-largest exporter to Pakistan, while Saudi Arabia is its fifth-largest source for petroleum exports. Both Saudi Arabia and the UAE have long been major destinations for Pakistani labor as well. There are an estimated 2.6 million Pakistanis living in Saudi Arabia, and another 1.7 million in the UAE. Saudi Arabia is also the largest source of remittances for Pakistan, followed by the UAE.
The fact that a member of the Sharif family is once again in the prime minister’s office improves the prospects of further bolstering Pakistan’s ties with the Gulf states. The Sharif dynasty managed to form a coalition government in March, following the February elections, despite the popularity of the ousted and incarcerated former Prime Minister Imran Khan. The Sharifs have longstanding ties with the Saudis and Emiratis. In addition to helping Pakistan weather American sanctions after the Nawaz Sharif-led government went ahead and conducted its own nuclear tests, Saudi Arabia also provided personal aid to the Sharif family. After Gen. Pervez Musharraf overthrew and arrested Nawaz Sharif, the Saudis interceded to secure his release and gave refuge to him and many members of his family from 2000 to 2007. As a result, it is not surprising that the younger brother of the Sharif dynasty supremo, Shehbaz Sharif, has already visited Saudi Arabia twice since becoming prime minister. He also went on an official visit to the UAE in early May.
The promise of significant investments
Prime Minister Shehbaz Sharif’s visits to Saudi Arabia prompted a delegation of several Saudi companies to come to Pakistan in early May to explore investment opportunities worth an estimated $5 billion in a variety of sectors, including information technology, renewable energy, and tourism. There is also speculation concerning a $5 billion edible oil joint venture. While these projects hold considerable promise, only when the funds begin rolling in will the actual extent of Saudi investments in Pakistan be confirmed. Despite several announcements concerning Saudi plans to invest in a $10 billion oil refinery in the strategic deep-sea port city of Gwadar, there is little evidence to indicate that this project will actually be implemented.
The UAE’s Ministry for Investment has also confirmed a commitment of $10 billion in investments across various sectors of the Pakistani economy, although no timeframe or any specific details concerning the proposed investments have been made available yet. Pakistani entrepreneurs are not only looking to the UAE as an export destination but also as a trading hub due to its location and overall ease of doing business. A growing number of Pakistani companies are registering in Dubai, with over 3,000 joining its Chamber of Commerce in 2023 alone. These companies could help bolster existing trade and investment ties between the two countries.
There have been some encouraging signs of economic recovery in Pakistan recently. Citing official data, inflation is reported to have come down from nearly 38% a year ago to 11.8% over the past 12 months, and forex reserves have also tripled to around the $9 billion mark. Yet Pakistan is still struggling with lackluster growth. Whether its goal can be achieved of increasing its growth rate to 3.6%, up from the 2.4% recorded for the current fiscal year, remains to be seen. Pakistan's debt-to-GDP ratio is already hovering above 70% and interest payments on its national debt will soak up more than half of the government's revenues this coming financial year. It will also be difficult for the weak coalition government to stick to the tough austerity measures being mandated by the IMF, which risk provoking further displeasure among an already stressed and polarized populace. Pakistan is thus desperate to secure more foreign investments. Yet the country’s structural impediments and a tenuous security situation make it difficult to entice the FDI needed to service its mounting public debts, including those incurred to finance energy and infrastructure projects under the China-Pakistan Economic Corridor. Like China, and the US before it, Saudi Arabia and the UAE also consider their economic investments in Pakistan as an instrument to fulfill foreign policy goals.
Saudi Arabia and the UAE are increasingly emerging as key players in a multipolar world order, part of a group of middle powers that are demonstrating growing assertiveness on the global stage. Both Gulf states readily use their financial clout as a means to enhance their leverage in strategically vital regions such as South Asia. In turn, nuclear powers like India and Pakistan also remain keen to expand their ties with the UAE and Saudi Arabia to diversify their investor base and make themselves less vulnerable to great power machinations. India offers a much larger market, and its economy has experienced exponential growth in recent years, which makes it an attractive partner for foreign investors. For their part, the Pakistani establishment and ruling elite are trying to leverage their strategic and personal connections with the Gulf states in an effort to attract investment. The Sharif government has said that it prefers facilitating joint investments from Gulf companies, rather than securing additional loans, as it seeks to strengthen the country’s economy and put it on a more sustainable footing.
Promised investments will come with strings attached
Investors from the Gulf states seem increasingly interested in pursuing high-yield, low-risk returns that help diversify their national sources of revenue, rather than making longer-term investments in Pakistan that could boost local employment and drive bottom-up development. Saudi or Emirati plans to invest in capital- and machine-intensive corporate farming may, for instance, provide the government needed revenue but will not offer many opportunities for the rural workforce, aside from the fact that corporate farming can exacerbate land and water scarcity.
Yet in its desperation to boost FDI and shore up investor confidence, Pakistan has established a Special Investment Facilitation Council (SIFC). The SIFC was, in fact, created in June 2023, after the dismissal of the Imran Khan government, when the military establishment began to strengthen its already significant influence within the country’s political-economy. While this high-level committee is headed by the prime minister, the armed forces are also represented alongside several federal and provincial ministers and relevant bureaucrats. The military justifies its involvement in the council, as it did with a preceding special authority to expedite Chinese investments in Pakistan, on the grounds that it needs to ensure the safety of foreign investors. The direct involvement of the military in economic affairs is disconcerting to many who are unhappy with Pakistan’s prevalent hybrid governance model, consisting of post-colonial, non-representative, and authoritarian state institutions that rely on the patronage of the elites to rule over the marginalized masses.
Unfortunately, decades of US aid and technical advice to Pakistan have been unable to overcome elite capture, and may have instead exacerbated it. Chinese energy and infrastructure investments in Pakistan have done little to provide much-needed micro-economic stimulation either. It seems unlikely that profit-oriented investments by the Gulf monarchies will be able to offer more meaningful opportunities for ordinary Pakistanis, even if they do provide some help with stabilizing the economy and keeping the shaky coalition government afloat.
Syed Mohammad Ali is a non-resident scholar with MEI’s Afghanistan and Pakistan Program. Dr. Ali has extensive experience working with multilateral, bilateral, government, and non-government organizations on varied international development challenges.
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