Zafar Iqbal
Pakistan has decided to return USD 3.45 billion to the United Arab Emirates. The amount consists of three tranches: USD 2 billion in rollovers that have been renewed since 2019 but are now due under a shorter arrangement expiring on April 17, USD 450 million expiring on April 11, and USD 1 billion due on April 23. The government is not contesting the repayment. It is embracing it. An anonymous Finance Ministry official confirmed to the media that the UAE had requested the full return of its money, and that Pakistan was prepared to bear whatever cost was necessary to protect national dignity. That framing tells you a great deal about how this decision is being sold domestically. Whether it holds up under scrutiny is a different matter entirely.
There are two arguments offered in favour of repayment, and both have genuine weight. The first is reputational. Pakistan has never defaulted on an external loan. Not once. In a country whose economic credibility has been battered by decades of fiscal mismanagement, balance of payments crises, and serial IMF bailouts, that record is not a footnote. It is one of the very few sources of market confidence that Pakistan still commands. When the UAE called its loans, honouring that call without delay or negotiation sent a clear signal to every other creditor, bilateral and multilateral alike, that Pakistan meets its obligations even when doing so is painful. In an environment where sovereign defaults are becoming more common and creditors are increasingly cautious about emerging market exposure, that signal matters enormously.
The second argument is financial. The UAE loans carried a return rate of 6 percent. That is meaningfully higher than the rates applicable to the remaining USD 10 billion in rollovers held by China and Saudi Arabia. Retiring the most expensive external debt first is, in principle, sound financial management. If Pakistan was going to repay anyone ahead of schedule, the UAE tranche was the logical candidate on cost grounds alone. Combining reputational and financial logic, the government’s decision is defensible and, within the narrow frame of immediate obligations, correct.
But narrow frames are dangerous when the broader picture is one of structural fragility. Pakistan is currently on its third consecutive IMF programme since 2019, a sequence that reflects not temporary turbulence but deep and persistent economic dysfunction. The current arrangement, a USD 7 billion Extended Fund Facility approved in October 2024 for a period of 36 months, was built on commitments that include securing rollovers from the UAE, China, and Saudi Arabia as part of the external financing assurances underpinning the programme. The IMF’s own approval documents were explicit: restoring fiscal and external viability is critical to Pakistan’s capacity to repay the Fund itself. The December 2025 second review reinforced that message, flagging the risks posed by global financial uncertainty and stressing the essential nature of firm and credible financing assurances from official creditors.
The UAE was one of those official creditors. Its exit does not just remove USD 3.45 billion from Pakistan’s reserves. It removes one of the three pillars on which the current IMF programme’s external financing architecture was constructed. Whether the Fund considers this a material change to programme conditions will depend on how quickly and convincingly Pakistan can demonstrate an alternative financing source. That conversation will almost certainly arise during the fourth review of the ongoing EFF. The government may be confident it can manage that conversation, but confidence and capacity are not the same thing.
The reserve impact is immediate and significant. Pakistan’s foreign exchange reserves stood at USD 16,381.7 million as of March 27, 2026. After repayment of the full UAE amount, those reserves would fall to approximately USD 12,931.7 million. At that level, the reserves may no longer be equivalent to three months of import cover, which is the IMF’s standard benchmark for member countries, particularly those on active programmes. Pakistan is not only on an active programme, it is doing so against the backdrop of ongoing conflict in the Middle East, which continues to generate unpredictability in global fuel markets and supply chains. Falling below the three-month import cover threshold in this environment is not a theoretical concern. It is a real vulnerability that could quickly translate into renewed pressure on the external account.
The consequences do not stop at reserves. Rupee-dollar stability, which has held for several months and provided a rare source of macroeconomic calm, will come under direct pressure. When reserves fall sharply, currency markets respond. A weakening rupee raises the cost of debt servicing for all foreign currency obligations, inflates import bills, and drives up the mark-up burden in the federal budget. The government would then face a familiar and unpleasant choice: raise revenue, cut expenditure, or absorb the additional fiscal pressure into an already stretched deficit. None of those options is easy, and the political will to pursue meaningful fiscal consolidation has historically proven inadequate in Pakistan at the precise moments when it is most urgently needed.
The government’s supporters counter that Pakistan’s growing geopolitical profile will attract replacement financing. The country’s role as a regional interlocutor, its relationships with Gulf states, China, and increasingly with Western powers watching South Asia, does grant it some strategic leverage in capital markets. Another bilateral lender may step in. The IMF itself may choose to defer the financing gap to a fifth review rather than treat it as a programme-threatening development. Perhaps both happen. These are not unreasonable possibilities.
But they remain possibilities, not certainties. And Pakistan’s economic management cannot continue to be conducted on the assumption that geopolitical goodwill will always arrive in time to cover the gaps left by structural weaknesses. The decision to repay the UAE was, at its core, the right one. Protecting Pakistan’s external repayment record is non-negotiable. But the circumstances that made this repayment a source of vulnerability, rather than a routine transaction, point to deeper failures that no bilateral favour can permanently resolve.
Dignity in debt repayment is commendable. Fiscal discipline that avoids creating such crises in the first place would be far more valuable.
