Pakistan Economic Fragility Exposed as UAE Withdraws $3.5bn

During heightened tensions linked to the US-Israel conflict with Iran, Pakistan drew international attention for its diplomatic outreach. However, behind this image of stability, a sudden financial strain exposed the country's dependence on external support, according to Dawn report.

The United Arab Emirates withdrew $3.5 billion in deposits, creating immediate pressure on Pakistan's foreign exchange reserves, the report said.

This came alongside an impending $1.3 billion Eurobond repayment, intensifying concerns over the country's liquidity position.

The UAE's move was particularly striking as it had previously assured the International Monetary Fund of maintaining its financial exposure to Pakistan until 2027. The reversal underscores the uncertain nature of bilateral financial commitments and highlights Pakistan's vulnerability to external decisions.

In response, Saudi Arabia stepped in with a $3 billion deposit to stabilise reserves and prevent disruption to Pakistan's IMF-backed Extended Fund Facility programme.

Riyadh also signalled that its earlier $5 billion deposit would no longer be rolled over under previous terms, effectively raising Pakistan's liabilities to the kingdom to $8 billion and deepening financial interdependence.

While Saudi support provided short-term relief, the episode has renewed scrutiny of Pakistan's economic resilience. Despite three IMF programmes since 2019, structural weaknesses remain largely unaddressed. Fiscal indicators show some improvement, including a primary surplus of 1.3 percent of GDP in FY25. However, analysts note that these gains have been achieved through heavy taxation and rising energy costs, placing a disproportionate burden on citizens while government spending continues to expand.

Inflation has moderated, but high interest rates -- maintained on IMF advice -- have dampened investment and export competitiveness, trapping the economy in a low-growth cycle.

A recent current account surplus, the first in over a decade, has also been attributed to strict import controls and reduced foreign business activity rather than sustainable export growth.

Pakistan's external position remains particularly fragile. Of the State Bank's $16.3 billion reserves, a significant portion consists of deposits from "friendly" countries, leaving the country exposed to sudden withdrawals. Public debt has climbed to over 70 per cent of GDP, well above the statutory limit, while interest payments now consume the bulk of government revenues, as per the report.

- IANS