Pakistan’s chronic reliance on external debt stems from fiscal mismanagement, elite capture, and failure to expand the tax base or restructure state-owned firms, a report highlighted. The country plans to repay $3.5 billion in debt to the UAE by April 2026, portraying it as an act of sovereign pride. However, the UAE’s request for immediate repayment of funds provided in 2019 to stabilize Pakistan’s balance of payments challenges this narrative.
Abu Dhabi’s refusal to grant a two-year rollover and interest rate reduction, despite Pakistan’s improved credit ratings and global borrowing costs, exposes the fragility of Gulf deposits as lifelines for Pakistan. This move, seen as a principled stand by Islamabad, is actually a response to the UAE’s liquidity needs amid regional tensions. The report underscores a contradiction in Pakistan’s foreign policy, revealing a country striving for global recognition while grappling with economic vulnerabilities.
Pakistan’s rush to repay the UAE debt to reset its creditor-debtor dynamic and impress the IMF and global markets may backfire. This move risks portraying Pakistan as financially strained, potentially leading to tighter monetary policies or harsher borrowing terms. The report warns that this decision could strain relations with other Gulf partners and undermine the stability that the repayment aims to protect.
The narrative of national dignity, used to justify the debt repayment, may not hold weight unless Pakistan addresses its economic challenges. Returning the UAE funds may boost short-term pride but could have long-term economic repercussions. This move, perceived as performative sovereignty, highlights Pakistan’s ongoing struggle to break free from economic cycles. Until Pakistan tackles its economic reality head-on, setbacks like this may recur.
