Gives time for discussions about maturity, interest rate; Pakistan seeks a 2-year rollover, an interest rate of 3%
ISLAMABAD:
The United Arab Emirates (UAE) has rolled over $2 billion in debt in a month at the existing interest rate of 6.5% as Pakistan continues to hope for a better deal from the Gulf nation to avoid pressure on its foreign reserves, federal government officials said on Monday.
This was told by highly placed sources in the federal government and the central bank Express Pakinomist that the United Arab Emirates transferred two loans of $1 billion each, which expired on January 16 and 22. They said the debt was rolled over for a month to allow time for further discussions about the term and interest rate. Pakistan is seeking a two-year rollover and an interest rate of around 3%.
A State Bank of Pakistan (SBP) spokesman did not respond to a request for confirmation. The Ministry of Finance, which is responsible for meeting external funding requirements for the International Monetary Fund (IMF), also did not respond to queries.
The officials said another request was made to transfer the debt as its repayment would create a funding gap which would have to be filled from other sources.
Under the $7 billion IMF program, the UAE, Saudi Arabia and China have committed to maintain their combined $12.5 billion in cash deposits with the SBP at least until the program expires in September next year.
However, this is the first time that the UAE has extended the debt repayment period by just one month, as opposed to the previous practice of giving a one-year extension. Officials said the situation regarding the maturity and maturity of the debt would become clearer in the coming days.
In December, SBP Governor Jameel Ahmad had requested the UAE government to roll over $2.5 billion in debt for two years and cut interest rates by almost half.
Subsequently, Prime Minister Shehbaz Sharif also requested the UAE President to extend the repayment period. The prime minister said the United Arab Emirates had agreed to transfer the debt, but gave no further details.
A central bank source said Pakistan had wanted a two-year extension and a cut in interest rates by more than half.
The United Arab Emirates gave $2 billion to Pakistan in 2018 for one year, but Pakistan was unable to repay the amount and since then has applied for rollovers annually. Later, the UAE extended another $1 billion loan in 2023 to help Pakistan meet external financing requirements for an IMF bailout.
The $2 billion debt forms part of Pakistan’s $16 billion foreign exchange reserves. Pakistan pays about $130 million annually in interest on the UAE debt at current rates.
Addressing leading exporters and industrialists last week, Prime Minister Shehbaz Sharif acknowledged that central bank reserves had increased but said this was largely due to $12 billion in cash deposits from friendly countries.
He also said that when he traveled the world to seek financial help, he felt embarrassed. “Our self-respect suffers a lot when we take on debt,” he said, adding that such countries sometimes ask for concessions in return and “we can’t say no to many things they want us to do”.
The government is struggling to boost exports, which have fallen nearly 7% to $18.1 billion in the first seven months of the current fiscal year. The prime minister has announced a cut in interest rates for export refinancing schemes and reduced electricity prices for industries to reduce the overall cost of doing business.
According to Musadaq Zulqarnain, one of Pakistan’s largest exporters, these measures would help reduce overall costs by about 2%.
The government is also struggling to formulate a viable plan to double exports from $32 billion over the next three years to exit the IMF program. Foreign investment has not increased despite the efforts and instead fell by 47% during the first half of the financial year.
In 2018, the UAE charged 3% interest on debt, but last year it increased 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.
Pakistan’s stability in the external sector remains heavily dependent on the transfer of foreign loans and the securing of new financing from the IMF and the World Bank.
