State Bank of Pakistan Governor Jameel Ahmad said on Wednesday that the United Arab Emirates (UAE) was not demanding repayment of a $2 billion loan, but had instead shifted it to a monthly rollover.

The SBP governor provided the National Assemly’s Standing Committee on Finance insights into the country’s economic challenges, including the UAE’s loan rollover, inflation rates and export performance.

“The UAE is not asking back for a loan of $2b. The only difference is that earlier the UAE’s loan was rolled over on an annual basis, now it is being rolled over on a monthly basis,” he said.

 “Initially, the debt servicing had reached $4b, but this has now been reduced,” he stated, acknowledging the strain on Pakistan’s exports.

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Highly placed sources in the federal government and the central bank told The Express Tribune last month that the UAE had rolled over two loans of $1b each, which matured on January 16 and 22. They said the debt was rolled over for one month to allow time for further discussions on the tenor and interest rate. 

Under the $7b International Monetary Fund (IMF) programme, the UAE, Saudi Arabia and China have committed to maintaining their combined $12.5b in cash deposits with the SBP at least until the programme expires in September next year. However, last month was the first time the UAE extended the debt repayment period by only one month, unlike the previous practice of granting one-year extensions. 

In December, Govenor Ahmad had requested the UAE government to roll over $2.5b in debt for 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.

The UAE provided $2b to Pakistan in 2018 for one year, but Pakistan was unable to repay the amount and has sought rollovers annually since then. Later, the UAE extended another loan of $1b in 2023 to help Pakistan meet external financing requirements for an IMF bailout.

The $2b debt forms part of Pakistan’s foreign exchange reserves of $16b. Pakistan is paying about $130 million annually in interest on the UAE debt at current rates. In 2018, the UAE charged an interest rate of 3% on the debt, but last year increased it to 6.5%. Pakistan has requested the UAE to reduce the rate to around 3%, citing improvements in its credit rating and lower global interest rates.

Pressure on exports

The governor further highlighted that, despite the ongoing pressure on exports, the situation was being managed. This, he noted, was partially due to declining food prices globally, including a reduction in rice exports, which alone accounted for a $1b drop.

Regarding inflation, the SBP governor projected that it was expected to stay between 5% and 7% this year.

“In 2022, the current account deficit was $17.5 billion, but through strategic measures, we managed to reduce it to just 1% of GDP in 2023, with a surplus of $2b,” he explained. Ahmad pointed out that this marked the first current account surplus in 14 years.

He further stated that foreign exchange reserves had increased significantly, from $2.8b, just enough for two weeks of imports, to over $16b. His target, the governor said, was is to raise the reserves to $18b by the end of June 2026 and to $20b by December 2026.

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The governor also discussed Pakistan’s rising external debt, which has grown from $55b in 2016 to $103b. He assured that the debt level had remained stable since last year, and Pakistan’s total debt stood at $148b, with the government’s share at approximately $103b.

In response to concerns raised by the committee, Chairman Saleem Mandviwala remarked that the country’s export schemes were being phased out, which he believed contributed to the pressure on exports.

However, the SBP govenor countered that export financing schemes had not been abolished and attributed the export decline to multiple factors, including the global food price drop and weaker demand.

Furthermore, the governor acknowledged the economic strain of being under an IMF programme, which limited the country’s ability to offer subsidies and rebates. He noted that, despite challenges, the central bank continued to pursue strategies to ensure economic stability.