Pakistan to repay $3.5 billion UAE debt amid West Asia tensions, reserves under pressure

Pakistan has announced that it will repay the $3.5 billion United Arab Emirates debt. According to a senior Pakistani Cabinet Minister, the repayment will be made to its “brotherly country” UAE, after it declined rollovers of the loans. He added that Pakistan could not compromise “national dignity" for "financial considerations”. This comes amid the escalation in the West Asia and the need for immediate settlement after shifting from annual to short term month to month extensions.

These funds were part of an external financial assistance issued by Abu Dhabi to Islamabad in 2019. The entire debt amount is roughly $3.5 billion over the last 30 years, to address the balance-of-payment crisis and maintain foreign exchange reserves. Pakistan's Cabinet has approved a three-part repayment of the loan: $450 million on April 11, $2 billion on April 17, and $1 billion on April 23.

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This repayment, along with the $1.3 billion Eurobond maturity, will put the total capital outflow for April to $4.8 billion, reducing Pakistan's foreign exchange reserves by nearly 18 per cent. However, the government claims that the foreign exchange reserves are at comfortable levels. Pakistan maintains a Foreign exchange reserve of $16.4 billion before the capital outflow of April.

Under the IMF's 37-month Extended Fund Facility (EFF) valued at approximately $7 billion, Pakistan must maintain a $12.5 billion in cash deposits from external financing. For Pakistan, this is from China, the UAE and Saudi Arabia. This is done to artificially prop up the foreign reserves. Now, as the UAE is increasingly becoming uncertain and Pakistan is paying $3.5 billion back to its lender, it reduces the cushion and risks pause of EFF disbursements from the IMF. However, there are also reports of discussions between the two parties to convert the paid sum into investments in the energy and infrastructure sectors.

The Finance Ministry of Pakistan said in a post on X that it is “continuously monitoring and managing Pakistan’s external flows in order to ensure stable foreign exchange reserves”, It added, “The government of Pakistan remains committed to fulfilling all its external obligations."