ISLAMABAD: Pakistan has formally requested the United Arab Emirates (UAE) to roll over approximately $2.5 billion in debt for a period of two years and reduce the interest rate by nearly half, including on a long-standing $450 million loan taken almost three decades ago. The request was made around the time of the recent visit of the UAE president to Pakistan, according to official and central bank sources.
Following his meeting with the UAE president, Prime Minister Shehbaz Sharif stated that the UAE had agreed to roll over the debt, though no further details were disclosed regarding the duration or revised interest rates. Separately, the World Bank informed Pakistan this week that the country’s investment levels continue to remain below the targets set under the $20 billion Country Partnership Framework (CPF), highlighting ongoing structural challenges facing the economy.
Central bank and government sources indicated that Pakistan requested the rollover of $2.45 billion in maturing UAE debt. Of this amount, $1 billion was due to mature on Friday, while another $1 billion is scheduled to mature next week. Sources said the UAE president had already agreed in principle to extend the repayment period, although it remains unclear whether the extension will be granted for one year or two years. Pakistan has sought a two-year extension along with a significant reduction in the interest rate, according to central bank officials. Responses from the State Bank of Pakistan and the Ministry of Finance were awaited at the time of reporting.
Prime Minister Shehbaz Sharif reportedly briefed the federal cabinet that a $2 billion repayment was due and that the UAE was extending the repayment period. The UAE had previously extended $2 billion to Pakistan in 2018 for one year. This debt forms part of Pakistan’s foreign exchange reserves, which currently stand at around $16 billion. Deputy Prime Minister Ishaq Dar stated earlier this week that Pakistan still owes approximately $12 billion to friendly countries, including $5 billion to Saudi Arabia, $3 billion to the UAE, and $4 billion to China.
In 2018, the UAE charged an interest rate of around 3% on its deposit, but last year the rate was increased to about 6.5%. Sources said Pakistan has now requested the UAE to reduce the interest rate to around 3%, citing improvements in Pakistan’s credit rating and a softer global interest rate environment. The second deposit of $1 billion from the UAE was received in July 2023 as part of the International Monetary Fund’s requirement for Pakistan to arrange $3 billion in external financing ahead of a short-term bailout programme.
Officials also disclosed that Pakistan took a $450 million loan from the UAE in 1996–97, which remains unpaid and continues to carry an interest rate of 6.5%. The government has sought a two-year extension on this obligation as well, arguing that it will be unable to retire the debt during the ongoing IMF programme, which is scheduled to end in September next year.
Pakistan’s external sector stability remains heavily dependent on the rollover of foreign loans and securing fresh financing from multilateral institutions such as the IMF and the World Bank. The country continues to struggle with export growth, as exports declined by nearly 9% to $15.2 billion during the first half of the current fiscal year. In response, Prime Minister Shehbaz Sharif has constituted a committee to explore ways to increase exports from $32 billion last year to $63 billion within four years.
Foreign investment has also remained subdued despite government efforts. A World Bank delegation met Finance Minister Muhammad Aurangzeb this week and noted that Pakistan’s investment levels remain below the $20 billion target set under the CPF. World Bank Country Director Bolormaa Amgaabazar briefed the finance minister on the framework, stressing the need to accelerate private investment to meet development goals.
The World Bank board approved a 10-year, $20 billion financing package for Pakistan last year, but its disbursement is contingent on improvements in economic indicators and compliance with policy-based lending conditions. Discussions with the World Bank delegation focused on developing a coherent investment framework aligned with CPF objectives, including business environment reforms, state-owned enterprise restructuring, trade facilitation, capital market development, and export competitiveness.
The Ministry of Finance said both sides acknowledged progress in achieving macroeconomic stability through prudent fiscal and monetary policies, while emphasising the need to convert this stability into sustained economic growth, higher investment, and job creation. The World Bank also proposed a results-based approach with clearly defined policy milestones, performance indicators, and targeted technical assistance.
Last week, Pakistan sought the World Bank’s support for refinancing $36 billion in energy sector debt. While the lender indicated it may not be able to fund the entire amount, it signalled willingness to provide guarantees to cover part of the refinancing. According to the finance ministry, policy-based guarantees could be used in future operations to support liability management, refinancing of high-cost debt, and innovative financing solutions, subject to agreed reforms.
A preliminary proposal aims to replace expensive foreign debt with relatively cheaper multilateral financing to reduce the burden on end consumers. The government is seeking long-term, concessionary financing with a 15-year repayment period, including a four-year grace period, to help bring energy prices down to around 8 to 9 cents per unit, or approximately Rs25 per unit.
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