Pakistan faces a precarious financial moment as it prepares to repay a $3.5 billion loan to the United Arab Emirates (UAE), amid soaring global oil prices that are exerting intense pressure on its foreign exchange reserves.

This repayment accounts for approximately 18% of Pakistan’s foreign currency reserves, imposing substantial strain on the nation’s external buffers and heightening fears for the stability of the Pakistani rupee.

As of 27 March, the State Bank of Pakistan (SBP) maintained reserves of $16.4 billion, barely enough to cover three months of imports.

The rationale for the UAE’s insistence on repayment remains shrouded in uncertainty. Pakistan’s Ministry of Foreign Affairs dismissed speculation on 4 April, labelling it a “routine financial transaction” and minimising any potential political undertones.

Domestic media outlets indicate that talks over extending the loan terms may have collapsed.

In prior years, Pakistan leaned heavily on aid from the International Monetary Fund (IMF) and allies like the UAE, China, and Saudi Arabia to shore up its economy.

Such assistance enabled the rebuilding of reserves and steadied the currency, which hovered between 278 and 282 to the dollar prior to the escalation of the Iran conflict.

Since early March, the rupee has held steady, though the benchmark KSE-100 Index has tumbled by 15%, mirroring wider market anxieties.

To counter the reserve drain, the SBP might resort to tough actions, such as curbing imports, hiking interest rates, or tapping commercial banks for extra funds.

The situation worsens with a $1.3 billion bond repayment looming to international creditors this month, alongside anticipation of a $1.2 billion IMF tranche.

The UAE’s refusal to roll over the loan—once a reliable practice from Pakistan’s Gulf partners—hints at a change in Abu Dhabi’s approach, timed with Islamabad’s growing alignment with Saudi Arabia.

Sajid Amin, deputy executive director at the Sustainable Development Policy Institute (SDPI), emphasised the UAE’s pivotal role in helping Pakistan fulfil IMF programme financing thresholds during tough times.

He noted that the government opted for repayment after failing to negotiate a long-term extension, even at the elevated cost of 6.5%, and suggested geopolitical influences could be at play.

Nevertheless, UAE firms persist in their investments in Pakistan. International Holding Co, based in Abu Dhabi, recently took a stake in First Women Bank Ltd.

Meanwhile, AD Ports Group inked a 25-year deal in 2024 for cargo operations with the Karachi Port Trust.

Pakistan has also floated proposals to hand over its airports to Middle Eastern investors.

Past attempts to swap portions of the UAE debt for equity, such as stakes in Fauji Foundation subsidiaries, form part of Islamabad’s wider efforts to handle its external debts.

PTI