1. Pakistan’s economic situation is teetering on the brink as the country is facing a perilous financial crisis, scrambling to secure external financing to meet growing obligations. The country has received only temporary relief from a US$7 billion staff-level agreement with the International Monetary Fund.
2. Pakistan’s financing need for the 2023–2024 fiscal year is estimated at US$25 billion. To bridge this gap, Pakistan has turned to its traditional allies — Saudi Arabia, the United Arab Emirates (UAE) and China — to seek additional financial support, debt restructuring and foreign direct investment (FDI). Pakistan aims to re-profile US$12 billion in bilateral debt, with US$3 billion owed to the UAE, US$4 billion to China and US$5 billion to Saudi Arabia. The goal is to extend the repayment of these loans over the next three to five years, providing Pakistan with a more stable financial foundation.
3. Pakistan has opened the door to Gulf countries, especially Saudi Arabia and the UAE, through the Special Investment Facilitation Council — a platform to attract FDI in key sectors such as agriculture, mining, energy and infrastructure. FDI increased to US$1.9 billion in 2023–2024 fiscal year compared to US$1.6 billion in 2022–23 fiscal year, a 17 per cent increase. Although China remains the largest contributor, there has been an increase in FDI from Saudi Arabia and UAE, rising from US$1 million to US$10 million over the 2022–2023 fiscal year.
4. Saudi Arabia and the UAE have shown interest in agriculture and mining, sectors where significant investment opportunities exist. These investments align with their broader strategies — Saudi Arabia’s Vision 2030 and the UAE’s post-oil economy strategy — to diversify their economy away from oil dependency and expand their global influence. By investing in Pakistan, both nations seek to strengthen their diplomatic ties and economic presence in South Asia, tap into new markets and expand their geopolitical reach.
5. Pakistan has actively invited Saudi Arabia and the UAE to invest in specific projects identified through the Pakistan Sovereign Wealth Fund, which includes state-owned enterprises. Pakistan hopes these countries will make significant investments as it urgently needs foreign exchange and economic stimulus. The strong historical ties, people-to-people connections and growing alignment of business interests between Pakistan and these Gulf nations provide an additional layer of optimism.
6. The government believes that attracting investments from Saudi Arabia and the UAE would significantly boost Pakistan’s economic activity and provide much needed support during these difficult times. But Pakistan has yet to make significant improvement in its investment environment.
7. In May 2024, a Saudi delegation visited Pakistan to evaluate the proposed investments but chose not to proceed, citing that the projects did not meet their investment criteria. Both Saudi Arabia and the UAE are looking for well-structured and high-yield investments, not ventures driven solely by historical ties. Saudi Arabia made it clear that ‘We are taxing our people, we are expecting also others to do the same, to do their efforts. We want to help but we want you also to do your part’.
8. This response underscores the structural issue and distrust within Saudi financial circles towards Pakistan’s fiscal management. Pakistan must improve its presentation of investment opportunities to meet international standards and attract investors seeking robust returns, independent of geo-political and historical pressures.
9. Several systemic problems in Pakistan need to be addressed to attract and retain significant investments. Regulatory inefficiencies and a burdensome taxation system are major barriers. Investors often only realise these challenges after committing, finding themselves entangled in a complex web of predatory tax regimes, rent-seeking practices, elite captures, capital and financial market issues, and unpredictable exchange rate policies. These issues force companies to spend considerable time and resources seeking exemptions or other forms of relief, a process that is inefficient and unattractive at the international level.
10. Investors seek policy certainty, long-term stability and a conducive political environment. The economic cost of political instability is around 3 per cent of GDP. To attract investments from Saudi Arabia, the UAE and other potential investors, Pakistan must create a more stable, transparent and investor-friendly environment. Its regulatory framework, particularly regarding foreign investment and funds repatriation, may not be sufficiently conducive to attract Gulf capital. High debt levels and concerns about financial management could further deter Gulf investors.
11. The potential for attracting investment from countries like Saudi Arabia and the UAE is promising, especially as these nations actively expand their global economic footprint. If Pakistan can present attractive and well-structured projects, it could encourage these countries to increase their investment levels. But the focus must be on greenfield investments — those that create new infrastructure and opportunities in sectors with minimal domestic competition. Brownfield investments through partnerships with local businesses also have potential, as local businesses can provide the trust required within the system.
12. When foreign investments are heavily incentivised by the government, it is more difficult for local businesses to remain competitive. Foreign investors may be drawn more by the incentive than the business opportunity, leading to market imbalance where foreign entities dominate at the expense of local industries. A cautionary example is the Karachi Electric Supply Company, where ongoing subsidies to private investors have become a financial burden rather than an asset. Such investments create liabilities without offering long-term economic benefits.
13. Pakistan must carefully evaluate the nature of the investments it seeks. The government should prioritise projects that contribute positively to the economy, avoid creating perpetual financial liabilities and ensure that any sale or lease of national assets does not prioritise short-term gains over long-term economic growth. FDI can only come as complementary to domestic investment efforts. Thoughtful planning and strategic alignment with domestic market dynamics will be essential to ensuring that investments benefit the country’s future.
A RISING INDIA UNDERCUTS PAKISTAN’S INFLUENCE IN THE GULF
1. Despite the historical ties and deep-rooted connections between Pakistan and the Gulf states, India’s recent ascendancy in the region signals a profound shift in the geopolitical landscape. As India expands its influence through enhanced diplomatic, economic, and security partnerships with key Gulf nations like Saudi Arabia and the United Arab Emirates (UAE), Pakistan finds its traditional role increasingly overshadowed by its neighbor and arch-rival.
2. Pakistan’s relationship with the Gulf States, especially Saudi Arabia and the UAE, has historically been anchored in shared religious and ideological identities, as well as compatible economic and security interests. For decades, Pakistan has played a crucial role in supporting the Gulf States through economic migration, military cooperation, and intelligence sharing.
3. The strategic partnership between Pakistan and Saudi Arabia, for instance, dates to the Cold War era, when both nations, along with the United States, collaborated to curb Soviet influence in Afghanistan. This relationship was further strengthened by shared security concerns, the rise of Al Qaeda and other extremist groups around the turn of the century.
4. Loans
5. Over the years, Saudi Arabia and the UAE have provided Pakistan with substantial financial aid during times of need. These contributions have been crucial to supporting Pakistan’s military endeavors, providing sanctions relief, responding to natural disasters, and stabilizing Islamabad’s economy. Saudi support represented a crucial financial lifeline during Pakistan’s wars with India in 1965 and 1971, and again after it declared itself a nuclear power in 1998. Saudi Arabia supported Pakistan with $10 million in humanitarian aid after the 2005 Baluchistan earthquake and $170 million during the 2010-2011 floods.
6. Owing to an economic crisis that has lasted for more than a decade, Pakistan continues to depend on financial support from Saudi Arabia and the UAE. From 2014–2022, Pakistan received three Saudi financial aid packages totaling nearly$9.5 billion. The UAE’s Abu Dhabi Fund for Development (ABFC) provided Pakistan with an annual $2 billion interest free loan to alleviate Islamabad’s balance of payment crisis. In 2023, as Pakistan’s foreign reserves reached dangerously low levels, the Emirati government again pledged to provide an additional loan of $1 billion.
7. Commerce
8. In 2021, the UAE was the second-largest exporter to Pakistan, while Saudi Arabia is Islamabad’s fifth-largest source for petroleum exports. Over half of Pakistan’s remittances, which account for 10% of the country’s GDP, come from the Gulf states, with Saudi Arabia the largest source, followed by the UAE. After India, Pakistan is the largest exporter of labor to the Gulf States. Over the past couple of years, the Gulf has become a major destination for hundreds of thousands of Pakistanis—many of whom are highly educated—who have migrated there in search of relief from the country’s domestic economic crisis.
9. Defense and security cooperation
10. The defense-security sector has traditionally formed the most significant link between Pakistan and its Gulf neighbors—especially between Pakistan and Saudi Arabia. With one of South Asia’s most capable militaries, Islamabad has provided significant military training and advisory support to both Saudi and Emirati armed forces. Pakistan’s military played a key role in the development of the Royal Saudi Air Force, assisted in ending the standoff during the 1979 Grand Mosque siege and were deployed in the 1980s to bolster Saudi defense.
11. Today, security cooperation remains a cornerstone of Pakistan-Gulf relations, with Pakistan’s military central to maintaining these bilateral ties through joint exercises, deployments, and weapons sales. Pakistan actively participates in maritime security initiatives like the Combined Maritime Forces’ CTF 150 and CTF 151, which advance counter-terrorism and counter-piracy missions, respectively. Islamabad also joined the Saudi-led Military Counter Terrorism Coalition (IMCTC), headquartered in Riyadh. Indeed, the IMCTC’s Commander is currently a retired four-star Pakistani general.
12. Challenges
13. Nevertheless, Pakistan and its Gulf partners have not always seen eye-to-eye. Relations hit a rough patch during the tenure of Pakistani Prime Minister Asif Ali Zardari (2008-2013). While Nawaz Sharif, elected in 2013, was strongly pro-Saudi, Pakistan’s refusal to join the Saudi-led intervention in Yemen strained bilateral ties. Additional tensions arose during the rift between the Gulf states from 2017 to 2021, in which Pakistan refused to pick a side. While Imran Khan, who became prime minister of Pakistan in 2018, worked to improve relations with Gulf partners, new frictions surfaced, such as the Gulf states’ indifferent response to India’s revocation of Kashmir’s autonomy. These issues reflect the different interests that continue to divide the Gulf monarchies and Pakistan, as well as potential pitfalls for future integration.
INDIA’S ASCENDANCE IN THE GULF REGION
1. While Pakistan’s historical ties with the Gulf have brought considerable benefits to both sides, regional dynamics are shifting increasingly in favor of India. Under the ambitious Prime Minister Narendra Modi, India has dramatically expanded its diplomatic and economic engagement with the Gulf states. Modi’s strategy aims to establish India as a significant player in both the Middle East and South Asia, especially amid the intensifying competition between the United States and China in the Indo-Pacific. Expanding interaction between Delhi and the Gulf spans several domains.
2. Burgeoning economic relationship
3. A key component of India’s relationship with the Gulf remains its energy acquisitions. Despite a rise in imports of discounted Russian crude, Gulf oil exports remain essential for India’s energy security, accounting for approximately 40 percent of its oil imports. Saudi Arabia supplies about 13.7 percent of India’s crude, while Qatar provides around 35 percent of its LNG supply.
4. Labor migration and remittances represent another cornerstone of India’s economic ties with the Gulf. According to a June 2024 World Bank report, over eight million Indians working in the Gulf contribute nearly 30 percent of India’s total remittances, with expatriates living in the UAE responsible for 18 percent alone.
5. Commerce also forms a vital pillar of the India-Gulf relationship—especially with Saudi Arabia and the UAE. Prime Minister Modi’s frequent visits to the UAE and the signing of the Comprehensive Economic Partnership Agreement (CEPA) in 2022, followed by a Bilateral Investment Treaty (BIT) this year, underscore growing trade ties. In 2022-2023, trade between India and the UAE reached $85 billion, positioning the Emirates as India’s third-largest trading partner, with exports totaling nearly $32 billion. India has similarly strengthened its trade relations with Saudi Arabia, India’s fourth largest trading partner in FY23, with bilateral trade valued at almost $53 billion.
6. A Broader Strategic Partnership
7. Since Modi’s first term began in 2014, relations between Delhi and the Gulf have expanded beyond energy, trade, and labor to encompass a broader strategic partnership. India-Gulf ties span several critical sectors, including fintech, clean energy, food security, and education, making the Gulf a key focus of India’s foreign policy. Efforts to attract investments, such as the BIT, and address regional security concerns, such as maintaining the flow of communications across the Indian Oce3an, Gulf of Aden, the Gulf and the Gulf of OMan, are central to this evolving relationship.
8. As a result, Emirati investment in India has surged nearly three fold, totaling $9.8 billion over the past five years. The UAE, now India’s fourth-largest source of foreign direct investment (FDI), has pledged $75 billion for infrastructure projects. Saudi Arabia has also contributed with a cumulative FDI of $3.22 billion from April 2000 to March 2024. Recent agreements between India and both Gulf monarchies aim to boost investments in renewable energy. The Strategic Partnership Council (SPC), which held its first meeting in September 2023, is set to guide trade and security ties with Saudi Arabia.
9. An Assertive Foreign Policy
10. India’s westward engagement reflects the country’s more assertive foreign and security policy under Prime Minister Modi, as seen in the Indian Navy’s active roles combating Somali piracy in the Gulf of Aden and projecting naval power in the Red Sea amid Houthi attacks on cargo vessels. This represents a shift from Delhi’s traditional approach to maritime security, which focused more on defensive naval and humanitarian operations.
11. With its growing influence in the Indian Ocean Region (IOR) and greater attention devoted to the western Indian Ocean and Arabian Sea, India is likely to continue its maritime security and naval cooperation engagements with the Gulf monarchies. India’s joint air, naval, and army exercises with the Emirates and Oman, and multilateral naval exercises with Qatar, Bahrain, and Saudi Arabia, further illustrate this trend. Additionally, Delhi has collaborated with France and the UAE in trilateral exercises and, like Pakistan, participates in the Combined Maritime Forces.
12. It must be noted that India’s evolving strategic engagement with the Gulf aligns with its increased strategic convergence with the United States—the Gulf monarchies’ most important security partner. Participation in the I2U2 (India-Israel-UAE-U.S.) initiative and the India-Middle East-Europe Economic Corridor (IMEC) underscores the breadth of India’s engagement with the Gulf states. While these initiatives primarily advance shared economic objectives, they have significant strategic implications, reflecting India’s growing multidimensional role in the Gulf—a position traditionally occupied by Pakistan.
Implications for Islamabad
1. As India cements its position as a key economic and security partner in the Gulf Arab region, Pakistan’s influence risks being eclipsed by that of its arch-rival. One of the most immediate concerns for Pakistan is the potential loss of Pakistan’s status as the predominant South Asian security partner of the Gulf states. The deepening defense cooperation between India and the Gulf, coupled with India’s growing economic clout and increasingly close relations with the United States, could diminish Pakistan’s role in regional security affairs. And the trendlines for Pakistan are not auspicious; in the Indo-Pacific, Pakistan’s strategic interests are closely aligned with those of China, a key rival of both the U.S. and India. Unless Islamabad changes strategic tack and moves closer to the United States, it could find itself excluded from a significant security role in the Gulf.
2. The rise of India as a major economic player in the Gulf could also undermine Pakistan’s traditional relationship with the region. Shifting commercial and labor dynamics in the Gulf could complicate Pakistan’s efforts to secure much-needed financial support from its traditional allies, exacerbating Pakistan’s already precarious economic situation, in the process.
3. Furthermore, Pakistan’s trade deficit with the GCC countries and its heavy dependence on deferred oil payments have reduced Islamabad’s leverage over the Gulf’s rich, hydrocarbon-exporting states. Conversely, India has steadily strengthened its economic and political influence in the Gulf region over the past two decades as it has developed.
4. Even projects that would appear promising for Pakistan harbor uncertainty. Following Prime Minister Shehbaz Sharif’s visits to Saudi Arabia, a delegation of Saudi companies arrived in Pakistan in early May 2024 to investment an estimated $5 billion across the information technology, renewable energy, and tourism sectors. Speculation also surrounds a potential $5 billion edible oil joint venture. Of course, the actual scale of Saudi investments in Pakistan will only be confirmed once funds start flowing. Despite numerous announcements regarding Saudi plans to invest in a $10 billion oil refinery in Gwadar, a strategic deep-sea port city, actual evidence supporting the project’s implementation is hard to come by. Similarly, the UAE’s Ministry for Investment has committed to investing $10 billion across various sectors of the Pakistani economy, though no specific details or timelines have been disclosed thus far.
5. Within this context, Pakistan continues to struggle to attract enough funding to keep its economy afloat. Pakistan is currently negotiating with the IMF to secure a fresh bailout that would stabilize its economy. Pakistan’s IMF outreach follows a $3 billion bailout Islamabad received last year that helped avert a default. While Pakistan continues to seek investment from Saudi Arabia and the UAE, questions remain about whether these funds will materialize and, even if they do, whether they will be sufficient to stabilize an anemic economy.
6. India’s increasing influence in the Arab Gulf represents a seismic shift in regional dynamics—one that bodes poorly for Pakistan. As India strengthens its economic and security ties with the Gulf states, Pakistan’s long-standing relationships in the region risk being supplanted by its biggest rival.
7. To be sure, India’s campaign to strengthen relationships with the Gulf states has been struck with setbacks. Notably, the ongoing conflict in Gaza has had an adverse impact on the development of the I2U2, as evidenced by the continued postponement of a senior-officials meeting since October 2023. Nevertheless, the Modi administration seems determined to ensure that economic initiatives such as I2U2 and IMEC progress despite regional instability, and that the overall trajectory of India-Gulf relations remains positive.
8. By contrast, the unexpected February electoral victory of Imran Khan’s Pakistan Tehreek-e-Insaf’s (PTI) and the formation of a fragile anti-PTI coalition backed by the military adds layers of uncertainty to Pakistan’s political future and economic stability. Amid these uncertainties, the Gulf states are likely to adopt a measured stance toward Islamabad, maintaining security relations with Pakistan while cautiously observing the evolving landscape as Khan’s political longevity is put to the test. The ruling government in Islamabad must stabilize the country’s fractious domestic politics, institute major economic reforms, and balance its relationships with Saudi Arabia, the UAE, and Iran, even as Gulf Arab partners expand their engagement with India.
Source:
https://eastasiaforum.org/2024/10/24/pakistans-struggle-to-secure-gulf-investments-amid-economic-crises/
https://gulfif.org/a-rising-india-undercuts-pakistans-influence-in-the-gulf/
