Pakistan\u2019s external financing outlook has come under renewed pressure after it failed to reach an agreement with the United Arab Emirates to roll over $3 billion in debt for the first time in seven years. The loan amounts to about 18% of Pakistan\u2019s foreign exchange reserves, putting significant pressure on the country\u2019s external buffers and threatening the currency at a time when high crude prices are draining its coffers. The State Bank of Pakistan\u2019s reserves stood at $16.4 billion as of March 27, enough to cover three months of imports. It\u2019s unclear what prompted the UAE to call in the loan now. The Foreign Office said on April 4 that the move was a \u201croutine financial transaction\u201d, seeking to downplay speculation of a possible political fallout between the two countries. Local media reports pointed to a breakdown in negotiations over the terms of a rollover. Pakistan managed to stabilise its economy in recent years with the help of loans from the International Monetary Fund and friendly donors like the UAE, China and Saudi Arabia. That helped Pakistan rebuild its reserves and steady the currency, which has traded in a range of 278-282 against the dollar before the Iran conflict began. The rupee has been little changed since the beginning of March while the nation\u2019s benchmark KSE-100 Index is down 15% after years of global outperformance. To offset the outflow of funds, the central bank may be forced to take unpopular steps, analysts said, such as restricting imports, raising interest rates or borrowing more from commercial banks. \u201cThe UAE repayment was unexpected and lacked prior arrangement,\u201d said Mohammed Sohail, chief executive officer at Topline Securities Ltd. \u201cWe think the central bank will opt for the old method of borrowing through commercial banks dollar swaps. The IMF doesn\u2019t like this and there are quarterly limits but this is a window that is available.\u201d IMF instalment Draining reserves further, the government is due to make a $1.3 billion bond repayment this month to international investors. Pakistan is also still awaiting the latest loan instalment of $1.2 billion from the IMF. The Washington-based lender didn\u2019t immediately respond to a request for comment. Failure to roll over the UAE debt, a standard practice with Pakistan\u2019s allies over the past decade, signals a shift in stance from Abu Dhabi and comes at a time when Pakistan is forging closer ties with Saudi Arabia. The UAE\u2019s Ministry of Foreign Affairs didn\u2019t immediately respond to a request for a comment. \u201cWe must acknowledge that UAE\u2019s help came at very crucial level when Pakistan was struggling to meet minimum financing arrangements to get the IMF program,\u201d Sajid Amin, deputy executive director at Sustainable Development Policy Institute in Islamabad, said by phone. \u201cI think the government decided to pay it back when it could not secure long-term rollover, despite paying a higher cost of 6.5%. However, one cannot completely rule out changing geopolitical situation.\u201d Pakistan previously tried to convert some of the UAE debt into equity. Deputy Prime Minister Ishaq Dar, who is also the country\u2019s foreign minister, said in November that the UAE was looking to convert investments into equity stakes in subsidiaries of the military-managed Fauji Foundation. UAE companies have made investments into Pakistan recently. The Abu Dhabi-based firm International Holding Co acquired a small Pakistani lender First Women Bank Ltd while AD Ports Group signed a 25-year concession pact for bulk and general cargo operations with Karachi Port Trust in 2024. Pakistan has also offered its airports in government deals to Middle East countries. While some analysts see enough liquidity in the foreign exchange market to prevent a freefall in the rupee, the drain on reserves could jeopardise the central bank\u2019s ambitious target of reaching $20 billion by the end of 2026. \u201cUnless we see compensatory inflows from Saudi Arabia to offset the UAE repayment, reserves will go down substantially,\u201d said Mohammad Shoaib, chief executive officer of Lucky Investments. \u201cThat doesn\u2019t bode well for market sentiment.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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