A report in the Financial Times that Saudi Arabia has agreed in principle to defer payments for crude oil sales to Pakistan worth $5.9 billion has raised speculation about what it is looking for in return.

The Daily Times suggests that the Saudis are buying political stability in Pakistan, which may include throwing a lifeline to President Pervez Musharraf.  "Apparently, the immediate impact will be on PML-N chief Nawaz Sharif's politics of confrontation with Musharraf, which will have to be diluted significantly in line with ground realities," it says. "The Saudis, like the Americans, want a stable transition to civilian rule and no confrontation between the politicians and the military, including Musharraf."

The Saudis have no interest in seeing Pakistan descend into chaos, not least because this would further strengthen al Qaeda which has set its own sights on the kingdom's rulers. It may also see Sunni-dominated Pakistan as a potential counterweight to Shi'ite Iran. So it would make sense for it to buy stability in Pakistan.

At the same time, Saudi Arabia is looking to use Pakistani farmland to grow grains  to protect itself from food shortages and rising prices, as indeed are other Gulf states.  So there may be an element of oil-for-food as well as oil-for-stability in the deal.

The  Daily Times adds a note of warning however in a subsequent editorial. It says Islamabad must also look to alternative sources of energy so that the Saudi bailout does not become "politically suspect".

One to watch, with no doubt far more to come before this deal is fully played out.

This is an idea that looks crazy at first glance -- Pakistan, struggling with its own food shortages and rising prices, rents out its farmland to grow grains for the rich Gulf states instead. 

But the idea appears to be gaining momentum. Saudi Arabia is holding talks with officials in Pakistan, among other countries, to set up projects to grow wheat and other grains to protect itself from crises in world food supplies. Dubai-based private equity firm Abraaj Capital has already said it is looking at investing in agriculture in Pakistan  and other Gulf countries are also showing an interest.

So is this good or bad news for Pakistan?

U.S. News & World Report says there may be "potential for large and enduring benefits on both sides. The reported sellers of under-developed farmland, Pakistan and Sudan, for example, are poor and lack the resources to make their own land productive," it says. "Foreign investment is meant to help the investor, but in these cases it might also help the host countries by improving roads and irrigation and, of course, providing cash."

The Financial Times last month quoted a senior Pakistani official  as saying of the talks to sell farmland to the United Arab Emirates: "Our aim is not to do away with precious farmland but in fact to raise the productivity of our farms and turn barren land in to fertile farmland."

On the positive side is the potential for big investments in Pakistan from wealthy Gulf economies looking to use windfall oil profits to diversify away from oil.  According to one expert, the cumulative sovereign wealth fund wealth in the Middle East is now about 1.5 trillion dollars, mostly in the United Arab Emirates; and their assets could triple or quadruple in five to 10 years time.

Pakistan also has an interest in keeping relations sweet with Saudi Arabia as it seeks a deal on deferred oil payments  to ease its own financial crisis. Is this the beginning of a new version of oil for food deals?

On the negative side are all the issues about sovereignty and economic control. And of course the perennial question in emerging markets. What will it mean for the poor man who is already struggling to feed his family.

Amid the conventional wisdom that Pakistan's economy is falling to pieces -- a view reinforced inside the country by soaring food prices and frequent power cuts -- it's interesting to see that someone still sees it as a hot market for foreign funds.

The Melchior Selected Trust Pakistan Opportunities Fund, one of the first funds to target Pakistan, believes the country's problems have been exaggerated and sees its market as having the potential of "India at half the price", according to this Reuters story.

It quotes Naz Khan, chief executive officer of KASB Funds in Karachi, as saying there is no reason to be particularly concerned by the tensions along the border with Afghanistan. "We have locked horns with India many times along the border with them in the last few decades," he says. "This is just a different border and it shouldn't affect the overall economy."

The story prompted me to hunt around to see what else is out there painting a positive picture of Pakistan's economy.

For starters, there is an economic growth forecast of 5.5 percent for the fiscal year starting in July, according to preliminary details on the budget due out next week. That is a level that the recession-haunted west can barely remember, let alone dream about.

Then there are record oil prices swelling the coffers of Gulf Arab states for whom Pakistan is a near neighbour and obvious investment target. The Dubai-based CPI Financial online newsletter says that investors are taking a long-term view on Pakistan's economic turmoil. Of particular interest is a boom in Islamic banking -- a sector relatively insulated from the credit crunch and dominated in the Gulf by Pakistani bankers.

CPI Financial quotes Mansoor Khan, managing director of Lahore-based law firm Khan Associates, as saying that conventional banks would probably be more affected by Pakistan's economic turmoil than their Islamic counterparts. "The conventional banks are western, risk-averse and do not understand ‘Pakistan risk.' Islamic banks are primarily Middle Eastern or Asian and have a better understanding of the mentality of Pakistan. They will not be put off."

It's also worth reading this blog on the South Asia Investor Review about Gulf Arab investors buying up farmland in Pakistan to increase food security and control inflation.

Pakistan's economy has proved incredibly resilient in the past, surviving amongst other things, military coups, three wars with India, the division of the country into West and East Pakistan (now Bangladesh) in 1971, and tough economic sanctions after its 1998 nuclear tests. So are reports of its demise premature?

The picture may be clouded by the volatility of Pakistan's stock market, hanging on every word of the bickering political parties elected in February, and feverishly debating the future of President Pervez Musharraf. But according to the last IMF report, a boom in foreign direct investment into Pakistan (more than $5 billion in 2006/07) was driven not so much by its -- until recently -- soaring stock market, but primarily by greenfield investment in areas like telecoms, manufacturing and financial services.

I'll return to the downside risks in another blog, but in the meantime would be interested in hearing whether other people out there think Pakistan still makes it as a hot, or at least warm, emerging markets destination. It's also worth wondering whether any shift in the origins of foreign investment in Pakistan -- still dominated by the United States -- towards more Gulf Arab funding would affect the political make-up of the country.