Bilateral Trade Between Pakistan and Saudi Arabia, Status and Prospects

An expanded CPEC could fast track Saudi-Pakistan development

By Farzad Ramezani Bonesh

Introduction

The relations between Saudi Arabia and Pakistan go back to the 1940s and before the independence of Pakistan. Pakistan has had close relations with Saudi Arabia since its independence in 1947. Relationships are rooted in religious, cultural, and commercial links and common Islamic ideals.

After from the signing of a friendship treaty in 1951, relations were later upgraded to the level of “strategic partnership”. The Saudi King Abdullah’s visit to Pakistan in 2006 was accompanied by agreements such as cooperation and avoidance of double taxation (DTA) agreement. In the past few years, an ongoing series of visits of leaders and senior officials have contributed to the strengthening of trade.

Geopolitical Collaboration

The China-Pakistan Economic Corridor

The second phase of the China-Pakistan Economic Corridor (CPEC) focuses on agriculture, industrialization, regions, mining, science and technology, and information technology. Promoting exports and increasing trade is a key focus of Pakistan under CPEC. Islamabad has already invited Saudi Arabia to join China as a partner. If the relative attachment of Saudi Arabia to CPEC is finalized, Pakistan can expect rapid development.

Energy

Saudi Arabia has played an important role in supplying Pakistan’s oil imports for decades. In recent years, with subsidized rates, it has met almost a quarter of the needs and has played an important role in maintaining the economic stability of Pakistan. In fact, the long-term repayment facility for Saudi Arabia’s oil exports to Pakistan has somewhat reduced the pressure on Islamabad for other foreign payments.

Riyadh provided oil for a full year with delayed payment in 2019 and has continued to allow Islamabad credit. The Saudi Fund for Development (SFD) provided US$5.4 billion worth of oil derivatives to Pakistan between 2019 -2023.

During his official visit to Pakistan in 2019, Saudi Crown Prince Mohammed bin Salman proposed Riyadh’s cooperation with Islamabad to build an oil refinery in Pakistan, but he faces challenges and has not as yet made progress with this proposal.

However, with the strengthening of political relations, the renewed attention of the two countries to finalize the US$14 billion contract for the construction of an oil refinery with the presence of Saudi Aramco and other partners in Gwadar port, it seems that the construction of a modern refinery in Pakistan and the refining of 350-450 thousand barrels of crude oil per day and construction of a petrochemical complex have been finalized.

In fact, several Pakistani oil companies are cooperating with Aramco in the refinery construction project, while Aramco will initially have a 30% stake in this project.

Recent MoU finalize energy cooperation can strengthen cooperation between the two countries5 and reduce the import of petroleum products and fuel demand in Pakistan.

In addition, Saudi Arabia’s participation in providing a loan of US$240 million to Pakistan for the construction of the Mohmand Dam (a complex of 800 megawatts of electricity capacity in the northwest of Pakistan) can play a vital role in providing water for agriculture, resisting floods, and maintaining energy and food security in Pakistan.

In other joint development programmes, hydrocarbons, electricity, clean technologies, localization of energy products and supply chains, renewable energy, solar energy, and wind energy have all been accelerated.

Investment and Food Security

Pakistan’s economy is facing extensive financial and economic bottlenecks such as economic stagnation, unemployment rate, lack of water and energy, and foreign debt. The depreciation of the Pakistani rupee against other currencies, and from the Saudi perspective can help solve Pakistan’s problems. It seems that Pakistan intends to strengthen its position in dialogue with international institutions with the facilities of Riyadh.

Saudi Arabia has already provided generous financial support to Pakistan. From 2018 to 2022, Riyadh’s support to Pakistan has exceeded US$22 billion dollars. Riyadh’s approach has actually made Pakistan more attractive to potential investors.

In addition, in April 2022, Shahbaz Sharif, as Prime Minister of Pakistan, traveled to Saudi Arabia and published a joint statement. This emphasized the two countries strengthening the work through the High Coordination Council, creating diversity in trade, and intensifying connections between the private sectors and business and investment opportunities. Saudi Arabian support for Pakistan’s economy, and financing and support for economic reforms in Pakistan have since increased.

Pakistan’s leaders are aware of the importance of Riyadh’s investment and its important role in the sustainable development of the country. Therefore, by offering investment opportunities to Saudi Arabia, they wish to reduce Pakistan’s economic problems as it makes its difficult transition to an industrialised society. Therefore, the formation of the “Special Investment Facilitation Council” is an important step in attracting foreign direct investment, especially from the countries of the Gulf Cooperation Council (GCC). The GCC also includes Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.

For example, Shahbaz Sharif, the Prime Minister of Pakistan, recently said that Pakistan expects to attract US$50 billion dollars in investment from the GCC for its green plan in the next five years. From Islamabad’s point of view, Pakistan has the potential to become the “green basket” of the GCC. This could increase Pakistan’s small share in the GCC’s US$40 billion annual food imports.

Saudi Arabia has already invested in the chemical, financial institutions, banking services, agriculture, dairy and information technology, and human resources development sectors. The sovereign Saudi Development Fund (SFD) has financed 41 development projects and programs in Pakistan.

Additionally, air service contracts, economic, commercial, and technical cooperation contracts, and double taxation avoidance agreements have played a proportional role in expanding relations.

Several recent agreements between Pakistan and Saudi Arabia include mineral exploration, solar energy in Balochistan, and the presence of two Saudi IT companies in Pakistan are likely to be implemented. In addition to the activity of about 400 Pakistani companies engaged in construction, architecture, chemicals, steel, metals, and information technology sectors in Saudi Arabia, the population of skilled and unskilled Pakistani immigrants (nearly two million people) plays an important role in building the infrastructure of modern Saudi Arabia.

Their annual remittances of billions of dollars in remittances back to Pakistan plays the biggest role in the diaspora and involved the lives of 15 million Pakistanis back home. Now, Islamabad expects that the Saudi Vision 2030, and the Green Saudi Middle East Initiative plans can provide opportunities for Pakistan in a number of sectors such as the provision of skilled manpower and premium capabilities.

In addition to hosting regional events, artistic and sports investments, and contracts in the field of sports, the Saudi approach can also help further develop business. For example, investing in small sports industries in northern Pakistan, infrastructure and tourism has trade impacts between the two countries, and especially as cricket mad Pakistan is looking to develop the sport in Saudi Arabia and the Middle East. Saudi Arabia is a suitable market for Pakistan’s potential in textiles (half of Pakistan’s total global exports), leather, and sports goods. The FIFA World Cup football used during the Qatar World Cup Finals last year were all produced in Pakistan.

In addition to the late 2022 Saudi Arabia–Pakistan Bilateral Investment Treaty, it is important to appreciate the negotiations concerning a full Saudi Arabia Free Trade Agreement, which may also involve the GCC. Negotiations have been slow due to changes of Government in Pakistan and the impacts of Covid. However, should an FTA materialize, the overall Saudi-Pakistan trade picture will be significantly enhanced.

Bilateral Trade Volumes

In 2021, Pakistan exported US$472 million to Saudi Arabia. The main products that Pakistan exported are rice, bovine meat, and spices. In 2021, Saudi Arabia exported US$3.4 billion to Pakistan. The main products that Saudi Arabia exported were crude petroleum, ethylene polymers, and propylene polymers.

Pakistan and Saudi Arabia’s trade volumes increased to US$4.6 billion dollars in 2022, with an expanded portfolio that also included plastics, textiles, coffee, and tea.

Vision

Terrorism and security problems, the reduction of foreign exchange reserves, concerns about non-payment of debts, the risk of being unable to fulfill its obligations and the unfavorable global credit rating, bureaucratic obstacles, and the lack of reforms in Pakistan are all challenges in expanding the countries trade relations with Saudi Arabia.

In a regional dynamic where Saudi Arabia’s trade with India (US$30 billion) is ten times larger that its trade with Pakistan, managing conflicts of interest is an important requirement for economic and business relationships.

However, geographically, the expansion of bilateral trade is certainly feasible, and there are still opportunities to integrate Saudi Arabia’s National Vision 2030 with Pakistan’s (SDGS) program and CPEC in Pakistan.

The normalization of relations between Iran and Saudi Arabia, the frequent exchange of business delegations, and the reduction of disputes over India can also help to strengthen trade.

In the meantime, it seems that various current variables are helping to strengthen trade and economic relations between Riyadh and Islamabad, and Saudi investments in Pakistan will likely continue to develop.

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