ISLAMABAD: Pakistan’s external financial situation faces renewed strain after negotiations with the United Arab Emirates over a $3 billion debt rollover failed,
According to the detail, This development marks the first such failure in seven years, raising concerns about the country’s external reserves.The debt represents approximately 18% of Pakistan’s total foreign exchange reserves, intensifying pressure on the country’s external buffers and posing risks to the Pakistani rupee, particularly amid high global crude oil prices draining national coffers.
As of March 27, the State Bank of Pakistan’s foreign reserves stood at $16.4 billion, sufficient to cover roughly three months of imports. The reasons behind the UAE’s decision to demand repayment at this juncture remain unclear. The Foreign Office, on April 4, described the move as a “routine financial transaction,” aiming to dismiss speculations of political tensions. However, local media suggested that disagreements over the terms of the debt rollover may have contributed to the breakdown in talks.
Pakistan has managed to stabilize its economy in recent years aided by support from the IMF and friendly nations such as the UAE, China, and Saudi Arabia. These loans helped bolster reserves and stabilize the rupee, which traded between 278-282 against the dollar before the Iran conflict escalated.
Since early March, the rupee has remained relatively stable, while the benchmark KSE-100 Index has declined by 15% after outperforming global markets for several years. Analysts warn that to counteract outflows, the central bank may need to implement unpopular measures, including restricting imports, increasing interest rates, or borrowing more from commercial banks.
“The unexpected nature of the UAE repayment and lack of prior arrangements suggest that the central bank might resort to conventional methods such as dollar swaps with commercial banks,” said Mohammed Sohail, CEO of Topline Securities Ltd. “Although the IMF generally disapproves of this approach and imposes quarterly limits, it remains a viable option for now.”
In addition to the UAE debt repayment, the government is scheduled to make a $1.3 billion bond payment to international investors this month. Pakistan is also awaiting the release of a $1.2 billion installment from the IMF, which has yet to comment publicly.
The decision not to rollover the UAE debt signals a potential shift in Abu Dhabi’s stance, especially as Pakistan is strengthening ties with Saudi Arabia. The UAE’s Ministry of Foreign Affairs has not yet responded to requests for comment.
Sajid Amin, Deputy Executive Director at the Sustainable Development Policy Institute in Islamabad, noted that UAE’s assistance was critical when Pakistan was struggling to meet minimum financing requirements for the IMF program. “The government might have decided to repay when a long-term rollover was no longer feasible, despite the higher cost of 6.5%. Geopolitical factors may also be influencing this decision,” he added.
Pakistan previously explored converting some of the UAE debt into equity stakes. In November, Deputy Prime Minister Ishaq Dar indicated that the UAE was considering converting investments into equity in subsidiaries of the Fauji Foundation, a military-controlled conglomerate.
UAE firms have made recent investments in Pakistan, including Abu Dhabi-based International Holding Co’s acquisition of First Women Bank Ltd and AD Ports Group’s 25-year cargo handling concession at Karachi Port Trust. Pakistan has also proposed offering its airports to Middle Eastern investors as part of broader economic deals.
While some analysts believe that sufficient liquidity remains in the foreign exchange market to prevent a sharp decline in the rupee, the depletion of reserves could threaten Pakistan’s goal of reaching $20 billion in reserves by the end of 2026. “Unless we see additional inflows from Saudi Arabia to offset the UAE repayment, reserves could fall significantly,” said Mohammad Shoaib, CEO of Lucky Investments. “This situation could negatively impact market sentiment.”
