Over the past two weeks, news regarding Pakistan has centered around the role played by the country in facilitating a temporary ceasefire between the United States and Iran. Though upon closer inspection, it appears that Pakistan was used by the Trump administration to provide an off-ramp from the conflict as a face-saving measure for Washington, rather than masterminding a serious and lasting peace. Nonetheless, Islamabad has sought to capitalize on the brief reputational boost, with Prime Minister Shehbaz Sharif claiming that “Pakistan has changed forever” as a result of its mediating role.

In reality, fundamental issues continue to plague Pakistan, including in the Middle East, where a dispute over financial deposit repayments threaten its relationship with the UAE.

Pakistan has been on the brink of economic collapse for years. In 2023, Human Rights Watch declared that the country was facing one of the worst economic crises in history, with the economy remaining fragile to this day. Structural weaknesses in the economy left Pakistan particularly vulnerable to global shocks, particularly the inflationary pressure and supply chain disruptions caused by both the Covid-19 pandemic and the war in Ukraine. Pakistan’s woes were subsequently compounded by domestic challenges, including rampant militarism, openly fixed elections, and rising tensions with neighboring Afghanistan – which have since escalated into “open war.” It is therefore unsurprising that in 2024, Pakistan sought support from the International Monetary Fund (IMF).

Settling the Account with the UAE

A key condition of the IMF bailout secured in September 2024 was that Pakistan rebuild its foreign exchange reserves, which had fallen below $10 billion that financial year. To this end, the UAE, along with Saudi Arabia and China, had provided assurances that they would be rolling over debts worth billions of dollars that were owed to them by Pakistan, ensuring that the country could secure the much-needed IMF assistance. In January 2025, two deposits in Pakistan’s central bank worth $1 billion each from the UAE had been set to mature, threatening to deplete Pakistan’s reserves. Following a meeting with Sheikh Mohammed bin Zayed Al Nahyan that month, however, Sharif confirmed that the deadline for the repayment of the $2 billion would be extended, with the deposits remaining in Pakistan for another year.

With this in mind, it came as a great surprise when, earlier this month, the Pakistani government announced that it would be repaying $3.5 billion worth of loans to the UAE. This total includes a loan of $450 million that Pakistan has owed the UAE since the late 1990s. Though unexpected, such a decision appeared imminent when, in January this year, the UAE rolled over its two deposits worth $1 billion each by just one month, instead of the usual one-year extension it had previously always granted on its debt. This was also despite pleas from Pakistan to roll over the debt by an additional two years. The repayment also coincides, unfortunately for Pakistan, with a Eurobond worth $1.3 billion, which was repaid on 8 April.

The announcement sparked speculation of a potential rift developing between Pakistan and the UAE. Although there has been no confirmation, Pakistan’s recently signed defense agreement with Saudi Arabia may well have put strain on its relations with the UAE, amid growing tensions between the Gulf kingdoms over Yemen. Other sources have claimed that the UAE’s displeasure with Pakistan’s closeness to Iran throughout the recent conflict in the Middle East is what triggered the immediate recall of funds. Within Pakistan itself, Senator Mushahid Hussain struck an ironic tone, mocking the UAE on television by describing it as “helpless”, and in need of support from its “big brother” Pakistan. The senator carried the same sarcasm onto X, remarking that Pakistan was merely helping its “UAE brothers in distress” who “badly need” the return of the $3.5 billion they had lent.

Evidently frustrated by the noise surrounding the issue, the Pakistani government has dismissed any claims that a falling out with the UAE has prompted this development. A statement issued on 4 April not only condemned the “misleading and unfounded” commentary surrounding the issue, but also chose to describe the repayments as a “routine financial transaction.” This framing, however, ignores some critical context. Just one month ago, Jameel Ahmad, governor of the Pakistani central bank, dismissed the possibility of any imminent repayment of loans to the UAE, stating definitively that the UAE was “not asking back for a loan of $2 billion.” Should Pakistan’s sudden repayments simply be a routine procedure, it seems unreasonable to suggest that the country’s central bank governor was kept in the dark. Similarly, contrary to Islamabad’s claims, the immediate repayment of such a large sum marks a clear departure from the established and longstanding pattern of repeated deadline extensions, rather than constituting ‘routine’ practice.

A Fraught Fiscal Outlook Going Forward

Now, Pakistan is once more facing a significant economic challenge at yet another point of global instability. The amount owed to the UAE represents nearly one fifth of Pakistan’s entire foreign exchange reserves, undoing significant efforts taken by the government to increase this total in line with IMF regulations. This demand for repayment also comes at a precarious time, where rising oil costs, already whittling away at the country’s finances, are projected to cause a rise of up to $1 billion in import costs. Equally concerning is the conflict’s potential impact on remittances from Pakistani workers in the Gulf, which represent a major source of income, accounting for between 5-6% of the country’s GDP. Even if peace is maintained in the Middle East, a souring of relations between the UAE and Pakistan could still have potential ramifications on foreign workers in the country.

Fortunately for Pakistan, Saudi Arabia has, on this occasion, come to its aid. On April 15, Pakistan’s finance ministry announced it had secured a loan from Saudi Arabia worth $3 billion. Whilst this ensures that Pakistan does not deplete its critical foreign reserves in the short term, it changes very little for Pakistan’s financial forecast in the long term. Islamabad will now likely have to come to the same rollover arrangement with Riyadh that had underpinned its financial relationship with Abu Dhabi over the past seven years. Yet, the root causes of Pakistan’s economic instability remain. Pakistan’s recent diplomatic gains may have provided a much-needed boost for the Sharif government but did little to address the country’s financial fragility. Moreover, Islamabad’s attempt to position itself as a credible mediator for the Middle East has potentially concealed its deteriorating relationship with regional partners like the UAE.