Why were Pakistan, UAE and Saudi Arabia troubled by the burden of debt?

Pakistan has been grappling with double challenges like political instability and economic crisis since last year. The instability in Pakistani politics also reached its peak after Khan’s arrest on corruption charges. This sparked violence in major cities across the country. The uproar has raised concerns among Pakistan’s allies in the Gulf, particularly the United Arab Emirates (UAE) and Saudi Arabia. Both the countries had earlier promised financial assistance to Pakistan. Partly fueling the political chaos in Pakistan is the country’s dire economic situation. Inflation has recently reached a record high of 35.4%. In the last one year itself, the Pakistani rupee has lost half its value against the US dollar. Perhaps most gravely for the government, Pakistan is facing an external debt crisis.

Islamabad’s external liabilities stood at over $126 billion in December 2022. These dollar-denominated loans have become more expensive to service, amid an environment of higher interest rates and a stronger greenback. Especially as the country’s foreign exchange reserves dwindle – the State Bank of Pakistan announced in December that its foreign exchange reserves had fallen to a four-year low of $6.7 billion. There is growing concern that Islamabad will default on its debts. The International Monetary Fund (IMF) is in talks with Pakistan for a bailout package to avoid default. In 2019, Pakistan signed a $6 billion deal with the IMF, which was followed a year later by a $1 billion deal. However, the IMF has refused to release the first payment of $1.1 billion until the organization receives guarantees that Pakistan’s international allies—specifically the United Arab Emirates (UAE), Saudi Arabia and China Ready to support Islamabad financially as well.

Mohammad Sohail, CEO of Topline Securities, a brokerage house in Karachi, told Al-Monitor that such a demand is a normal part of the process, but there are doubts whether the UAE and other allies will provide further funding given the growing political crisis. Will be ready to offer. China, UAE and Saudi Arabia have already provided commitments to the IMF. However, commitments of around $2 billion are still pending. If the UAE and Saudi Arabia side with Pakistan amid the current political instability, it will be fraught with risks. Both countries have strong commercial ties with Pakistan. Pakistan with a population of over 200 million is a big market for both Saudi Arabia and the UAE. The UAE’s trade with Pakistan is expected to exceed $10.6 billion in 2023. Bilateral trade between Saudi Arabia and Pakistan is also expected to be around $4.6 billion in 2022. Apart from this, Pakistan’s economic crisis may also raise questions on the practicality of the Pakistan-Gulf Cooperation Council trade deal. Negotiations are currently going on regarding this deal between Pakistan and the Gulf countries.