Allows time to be spent discussing duration and interest rate; Pakistan asks for a 2-year rollover, 3% interest
ISLAMABAD:
The United Arab Emirates (UAE) rolled over more than $2 billion of debt for one month at the current interest rate of 6.5%, as Pakistan continues to hope for a better deal from the Gulf country to avoid pressure on its foreign exchange reserves, federal government officials said on Monday.
Senior sources within the federal government and central bank said The Express PK Press Club that the United Arab Emirates renewed two loans of one billion dollars each, which expired on January 16 and 22. They said the debt was rolled over for a month to allow time for further discussions on the duration and interest rate. Pakistan is asking for a two-year rollover and an interest rate of around 3%.
A spokesperson for the State Bank of Pakistan (SBP) did not respond to a request for confirmation. The Ministry of Finance, responsible for meeting external financing needs to the satisfaction of the International Monetary Fund (IMF), also did not respond to questions.
Officials said another request was being made to roll over the debt because paying it off would create a funding gap that would have to be filled from other sources.
Under the IMF’s $7 billion program, the UAE, Saudi Arabia and China have committed to maintaining their combined cash deposits of $12.5 billion with the SBP at least until the program expires in September next year.
However, this is the first time that the UAE has extended the debt repayment period by just one month, unlike the previous practice of granting one-year extensions. Officials said the situation regarding the duration and maturity of the debt would become clearer in the coming days.
In December, SBP Governor Jameel Ahmad had asked the UAE government to roll over $2.5 billion in debt over two years and cut the interest rate by almost half.
Subsequently, Prime Minister Shehbaz Sharif also requested the UAE President to extend the repayment period. The prime minister said the UAE had agreed to roll over the debt, but did not provide further details.
A central bank source said Pakistan had requested a two-year extension and a reduction in the interest rate by more than half.
The UAE provided $2 billion to Pakistan in 2018 for one year, but Pakistan was unable to repay the amount and has since requested refinancing every year. Later, the UAE provided another $1 billion loan in 2023 to help Pakistan meet external financing needs related to the IMF bailout plan.
The $2 billion debt is part of Pakistan’s foreign exchange reserves of $16 billion. Pakistan pays around $130 million a year in interest on UAE debt at current rates.
Speaking to major exporters and industrialists last week, Prime Minister Shehbaz Sharif acknowledged that central bank reserves had increased, but said this was largely due to $12 billion in cash deposits from friendly countries.
He also said that when he traveled the world seeking financial help, he felt embarrassed. “Our self-esteem suffers greatly when we take on debt,” he said, adding that these countries sometimes ask for concessions in return and “we cannot say no to many things they want us to do.”
The government is struggling to revive exports, which fell nearly 7 percent to $18.1 billion in the first seven months of the current fiscal year. The Prime Minister announced a reduction in interest rates for export refinancing programs and a reduction in electricity prices for industries to reduce the overall cost of doing business.
According to Musadaq Zulqarnain, one of Pakistan’s largest exporters, these measures would help reduce overall costs by around 2%.
The government is also struggling to formulate a viable plan to double exports by $32 billion over the next three years to exit the IMF program. Foreign investment failed to recover despite efforts and instead fell by 47% in the first half of the fiscal year.
In 2018, the UAE imposed a 3% interest rate on debt, but last year it increased it to 6.5%. Pakistan has asked the UAE to cut the rate to around 3%, citing its improving credit rating and falling global interest rates.
The stability of Pakistan’s external sector remains heavily dependent on the rollover of foreign loans and obtaining new financing from the IMF and the World Bank.
