Pakistan's $3.5B UAE loan repayment puts IMF programme at risk

Pakistan will repay a $3.5 billion loan to the United Arab Emirates this month, two government officials said, raising fresh pressure on the country's foreign exchange reserves and risking a breach of targets under its International Monetary Fund programme, with a further $1.3 billion Eurobond repayment due by June.

The repayment comes as Pakistan works to maintain foreign exchange reserves above $18 billion by June under a $7 billion IMF programme, which requires bilateral deposits from friendly countries to be rolled over.

Central bank reserves currently stand at around $16.4 billion, meaning the UAE loan — equivalent to roughly 18% of holdings — represents a significant near-term drain if not replaced.

How the loan unravelled?

The UAE facility had been rolled over since 2018, including a $3 billion tranche carrying an annual interest rate of around 6%.

Earlier this year, the arrangement shifted from annual to monthly extensions before Islamabad decided to repay the full amount, with clearance expected by 23 April, one of the officials said.

A separate $450 million UAE loan that has remained overdue for years forms part of the total $3.5 billion now being repaid, the official added.

Geopolitical backdrop complicates the picture

Pakistan's foreign ministry said at the weekend that the central bank would begin repayments but rejected speculation that the decision was driven by geopolitical tensions over the Middle East crisis.

Pakistan is a longstanding ally of Saudi Arabia, while relations between Abu Dhabi and Riyadh have deteriorated in recent months amid the conflict in Yemen and lost oil revenue from the closure of the Strait of Hormuz.

Rising fuel costs and supply shortages linked to the Iran war are already fuelling inflation and weighing on growth, adding to the pressures facing an economy still in recovery.

IMF targets at risk if funds not replenished

The UAE deposits formed part of a broader package of support from friendly nations — including China and Saudi Arabia — that Pakistan had assured the IMF would remain in place during the programme.

It remains unclear whether Islamabad will move to replace the funds.

If reserves are not replenished, they will fall below the level agreed with the IMF, constituting a formal breach of programme conditions.

Combined with the $1.3 billion Eurobond maturing before the end of the fiscal year in June, total near-term external obligations are approaching $4.8 billion.

The IMF, Pakistan's finance ministry, and the central bank did not respond to requests for comment.

Market implications

The repayments represent a significant near-term drain on reserves and could weigh on the rupee, said Waqas Ghani, head of research at JS Global Capital. He added that timely support from friendly countries would be critical to stabilising reserves and restoring market confidence.