Pakistan Asks UAE to Reduce Interest on $2.5 Billion Loan

Pakistan has requested the United Arab Emirates to roll over $2.5 billion in debt for two years and reduce the interest rate by nearly half, including on a decades-old loan, according to a report by The Express Tribune.

The request was made around the time of the recent visit of UAE President Sheikh Mohamed bin Zayed Al Nahyan to Pakistan. After meeting the UAE leader, Prime Minister Shehbaz Sharif said that the UAE had agreed to roll over the debt, though no details were shared publicly.

The UAE president is understood to have agreed in principle to an extension, though officials were not clear whether the rollover would be for one year or two years. Responses from the State Bank of Pakistan and the Ministry of Finance were awaited at the time of reporting.

Prime Minister Shehbaz Sharif reportedly informed the cabinet that $2 billion in repayments were due and that the UAE had agreed to extend the repayment period. The UAE had previously extended $2 billion in 2018 for one year, and this debt currently forms part of Pakistan’s $16 billion foreign exchange reserves.

Deputy Prime Minister Ishaq Dar said this week that Pakistan still owes $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 3 percent, but last year raised it to 6.5 percent. Sources said Pakistan has now requested the rate be reduced to around 3 percent, citing improvements in Pakistan’s credit rating and easing global interest rates.

Officials also said Pakistan is seeking relief on a $450 million loan taken from the UAE in 1996–97, which remains unpaid and is currently carrying a 6.5 percent interest rate. The government has asked for a two year extension, saying it would be difficult to repay the loan during the ongoing International Monetary Fund programme, which ends in September next year.

Pakistan’s external stability remains heavily dependent on rolling over foreign loans and securing fresh financing from multilateral lenders. Export performance remains weak, with exports falling nearly 9 percent to $15.2 billion in the first half of the current fiscal year.

Prime Minister Shehbaz Sharif has constituted a committee to raise exports from $32 billion last year to $63 billion in four years, but foreign investment has yet to pick up meaningfully.

Separately, the World Bank informed Pakistan that its investment levels remain below the $20 billion target set under the Country Partnership Framework. A World Bank delegation led by Country Director Bolormaa Amgaabazar conveyed this during a meeting with Finance Minister Muhammad Aurangzeb.

The World Bank said progress had been made on macroeconomic stability but stressed the need to convert stability into higher investment, sustained growth and job creation. The bank also discussed the use of policy-based guarantees to support Pakistan’s liability management and refinancing of high-cost debt, subject to agreed reforms.

Last week, Pakistan also sought World Bank support for the refinancing of $36 billion in energy sector debt, with officials aiming to replace expensive loans with cheaper, long term financing to help reduce electricity prices to around Rs. 25 per unit.