Can Pakistan handle $3.5 billion UAE debt repayment? Experts earn of risks

New Delhi: Pakistan is confronting a critical financial challenge as it prepares to repay $3.5 billion to the United Arab Emirates this month, according to a senior cabinet minister who confirmed the obligation during a press briefing, as reported by Pakistan’s Express Tribune.

The repayment comes at a time when Islamabad’s foreign exchange reserves have dropped to alarmingly low levels, raising questions about the country’s ability to meet its external debt commitments.

UAE debt rollovers no longer an option

The pressure on Pakistan’s finances has been compounded by reports that the UAE will not provide further rollovers on the debt. For many years, Pakistan relied on such extensions from friendly nations to ease repayment pressures and stabilise its foreign reserves. Shifts in geopolitical dynamics, particularly tensions linked to the ongoing US-Israel-Iran conflict, appear to have influenced Abu Dhabi’s decision, accelerating Islamabad’s need to settle the debt, according to Sri Lanka’s Guardian newspaper.

Implications for Pakistan’s economy

The repayment will directly affect Pakistan’s already stretched foreign exchange reserves, economists warn, potentially weakening the country’s capacity to manage its external accounts. This may impact its ability to finance imports and maintain currency stability. The timing is particularly delicate, as Pakistan continues to navigate an economic recovery under the terms of an International Monetary Fund (IMF) programme.

History of financial ties with the UAE

The financial relationship between Pakistan and the UAE has experienced both collaboration and tension over the years. In 2018, Abu Dhabi provided $2 billion to support Pakistan’s economy, followed by an additional request from Islamabad for $1 billion in 2023 to meet external financing needs. These arrangements were part of a broader pattern in which Pakistan has relied heavily on bilateral partners to bridge funding gaps while implementing reforms linked to international lending programmes.

Exploring alternative solutions

With rollover options narrowing, Pakistan is considering alternative measures. Some officials have indicated that discussions are underway to convert portions of the debt into investments, a strategy that could reduce immediate repayment pressure while fostering longer-term economic engagement. However, such arrangements remain uncertain and may not provide the urgent relief required, the Guardian noted.

Regional geopolitical tensions are further complicating Pakistan’s financial situation. Islamabad’s perceived closeness to Iran amid the ongoing Middle East conflict has strained relations with Gulf partners, including the UAE. Historically, Pakistan has balanced its ties across the region, but shifting alliances and heightened tensions are testing this equilibrium, with potential economic repercussions.

Structural weaknesses amplify financial stress

Pakistan’s reliance on external financing, including IMF support and assistance from allied nations, highlights underlying structural weaknesses in its economy. Low export competitiveness, high fiscal deficits, and limited revenue generation have left the country vulnerable to external shocks, whether economic or geopolitical, the Guardian added.

IANS inputs