Pakistan swaps UAE debt for Saudi loans as $3.5bn repayment shock reshapes financing plan

Pakistan is restructuring its external obligations by replacing maturing debt to the United Arab Emirates with new borrowing from Saudi Arabia, a move that has allowed the government to meet repayment demands without reducing foreign exchange reserves.

Officials said Islamabad repaid $2 billion to the UAE on Saturday using fresh Saudi financing, bringing total payments to Abu Dhabi this week to $2.5 billion. The remaining $1 billion liability is scheduled to be cleared on Thursday through another Saudi loan tranche expected to be disbursed next week.

Despite the sizeable repayments, authorities maintained that the country’s foreign exchange reserves, currently hovering around $15 billion, will remain unaffected because the liabilities are being refinanced rather than settled through reserve drawdowns.

The sudden repayment demand from the UAE created a financing gap estimated at $3.5 billion, forcing the government to secure alternative funding to remain compliant with commitments under the $7 billion International Monetary Fund programme.

The finance ministry had not anticipated the repayments in its earlier projections and had assured the IMF as recently as last month that Pakistan’s external financing needs for the coming year were fully covered through expected rollovers from key bilateral partners, including China, Saudi Arabia and the UAE.

The $2 billion loan repaid this week was originally obtained in 2018 during the government of former prime minister Imran Khan to stabilise declining foreign exchange reserves at a time when negotiations with the IMF were delayed.

Earlier in the week, Pakistan also cleared a separate $450 million UAE loan taken in 1996-97 for a one-year period, closing an obligation that remained outstanding for nearly 30 years.

Alongside the new borrowing, Saudi Arabia has agreed to extend the tenure of its existing $5 billion cash deposit with Pakistan for another two years, continuing a critical source of external liquidity support. Officials said it remains unclear whether the extension and the newly arranged financing will carry the previous interest rate of about 4% or be priced at higher levels.

Saudi authorities are also expected to renew the $1.2 billion annual oil financing facility on deferred payments, which expires this month. Pakistan currently pays roughly 6% interest on the facility used to fund crude oil imports from the kingdom.

Separately, the government raised an additional $500 million in commercial borrowing on Friday at an interest rate of 7% through Eurobonds purchased by Standard Chartered Bank. The placement was made directly with institutional investors rather than being offered to the broader overseas market.

Under the IMF programme framework, Pakistan’s key bilateral partners have committed to maintaining combined deposits of $12.5 billion with the State Bank of Pakistan until the programme expires in September next year, providing a financial buffer against external shocks.

However, analysts warn that continued reliance on short-term bilateral financing to manage repayments may prolong structural vulnerabilities, as repeated refinancing cycles shift liabilities forward without materially reducing the overall debt burden.

Pakistan is required to report all foreign borrowing and repayment transactions exceeding $3 million to the IMF, including loans from multilateral institutions, bilateral lenders, commercial banks and other external financing sources, along with detailed records of exchange rates and rupee conversions for each transaction.