Government Requests Debt Rollover and Interest Reduction
Pakistan has formally requested the United Arab Emirates (UAE) to roll over $2.5 billion in debt for two years while reducing the interest rate by nearly half, including on a $450 million loan taken more than 30 years ago. The request coincided with the UAE president’s visit to Pakistan, during which Prime Minister Shehbaz Sharif confirmed that the UAE had agreed to extend the debt, though specific details regarding the duration and terms remain unclear.
Central bank sources indicated that $1 billion of the debt was maturing immediately, with another $1 billion set to mature next week. Pakistan is seeking a two-year extension along with a reduction in interest from 6.5% to around 3%, citing improvements in the country’s credit rating and globally lower interest rates.
Historical Context of UAE Loans
The UAE had previously extended $2 billion in 2018 for one year at an interest rate of 3%, which was later increased to 6.5%. Pakistan has also been servicing a $450 million loan from 1996-97 at the higher rate. Deputy Prime Minister Ishaq Dar noted that Pakistan still owes $12 billion to friendly countries, including $5 billion to Saudi Arabia, $3 billion to the UAE, and $4 billion to China.
The government seeks the debt extension as repayments cannot be made during the ongoing IMF programme, which concludes in September next year.
Economic Pressures and Export Challenges
Pakistan’s external sector stability is closely tied to the rollover of foreign loans and securing additional financing from the IMF and the World Bank. Exports remain below targets, dropping nearly 9% to $15.2 billion in the first half of the fiscal year, despite efforts to raise them from $32 billion to $63 billion over four years.
A committee has been constituted by PM Sharif to explore strategies to boost exports, while foreign investment continues to lag, highlighting ongoing economic challenges.
Engagement with the World Bank
The World Bank recently informed Pakistan that its investment levels remain below the $20 billion target set under the Country Partnership Framework (CPF). During meetings with Finance Minister Muhammad Aurangzeb, the bank stressed accelerating private investment and aligning policy reforms with CPF objectives, including trade facilitation, state-owned enterprise reforms, capital market development, and export competitiveness.
The World Bank also discussed potential use of policy-based guarantees to support liability management, refinance high-cost debt, and explore innovative financing approaches, contingent on Pakistan meeting agreed policy milestones.
Refinancing Energy Sector Debt
Pakistan has sought World Bank support to refinance $36 billion in energy sector debt. Preliminary proposals aim to replace expensive foreign debt with cheaper, long-term multilateral financing. The government seeks a 15-year repayment period with a four-year grace period to ease the power sector debt burden, ultimately targeting a reduction in energy prices to around 8–9 cents per unit (approximately Rs25 per unit).
This approach could significantly reduce costs for end consumers while improving fiscal sustainability and energy sector efficiency.
