ISLAMABAD: The Finance Division of Pakistan has confirmed that the entire $3.5 billion debt owed to the United Arab Emirates will be repaid this month, marking a significant shift in bilateral financial relations.

This decision ends months of speculation over repeated short-term rollovers of UAE deposits held with the State Bank of Pakistan.

A senior cabinet minister disclosed the development during a background briefing on Friday, stating that political leadership has opted for full repayment rather than further extensions.

The $3.5 billion exposure includes a $450 million loan originally taken in 1996-97 for just one year, which has remained outstanding for nearly three decades while accruing interest at 6.5 percent.

The remaining portion consists of more recent deposits, primarily $2 billion and $1 billion tranches placed in 2021 and 2023 to support Pakistan’s balance of payments during acute reserve crises.

These facilities carried higher interest rates up to 6.5 percent and had been subject to monthly or bimonthly rollovers in early 2026 after the UAE declined a requested two-year extension at reduced rates of around 3 percent.

Pakistan’s total bilateral support from friendly countries stands at approximately $12 billion, including $5 billion from Saudi Arabia, $3 billion to $3.5 billion from the UAE, and $4 billion from China.

These deposits have been critical in bolstering State Bank reserves, which rose from critically low levels of around $6.7 billion in late 2022 to over $16 billion and recently approaching $21.6 billion by early March 2026.

The repayment comes as Pakistan navigates its $7 billion Extended Fund Facility with the International Monetary Fund, approved in September 2024, which requires credible financing assurances and debt management.

Under the programme, Islamabad has already received multiple tranches, with a fourth $1 billion disbursement pending further reviews.

Analysts note that full repayment of the UAE debt signals improved external account management and may open doors for converting portions into equity investments or fresh commercial inflows.

Discussions are reportedly ongoing to transform some of the repaid amount into direct investments in Pakistani sectors such as energy, mining, and infrastructure.

The move also addresses long-standing sensitivities around the three-decade-old $450 million facility, often highlighted in domestic debates as a lingering symbol of past fiscal indiscipline.

Pakistan’s overall external debt and liabilities have climbed to a record $138 billion, with public sector external debt alone at $92 billion.

Debt servicing remains a major challenge, with obligations over the next five years nearing $50 billion.

In the current fiscal year, the country faces substantial repayment pressures, prompting reliance on rollovers and new financing from multilateral and bilateral sources.

Foreign remittances have provided some cushion, reaching $3.5 billion in January 2026 alone, led by inflows from Saudi Arabia at $739.6 million and the UAE at $694.2 million.

Exports and domestic revenue mobilisation efforts under the IMF programme have also contributed to gradual stabilisation.

The decision to repay the UAE debt in full this month is viewed as a confidence-building measure, potentially strengthening ties with Abu Dhabi at a time when Pakistan seeks greater foreign direct investment.

UAE leadership, including President Sheikh Mohamed bin Zayed Al Nahyan, has previously engaged directly with Pakistani counterparts on economic cooperation.

Earlier packages from the UAE included $3 billion cash deposits and $3.2 billion in deferred oil payments as part of broader Gulf support during balance-of-payments crises in 2018-19 and 2022-23.

Regional media reports, particularly from The Express Tribune, have consistently tracked these developments, providing detailed timelines of maturing tranches and negotiation outcomes.

International coverage of the latest repayment announcement remains limited, with most updates confined to Pakistani outlets reflecting the fast-evolving nature of the story.

The repayment is expected to slightly dent gross reserves in the short term but could be offset by fresh inflows, successful IMF disbursements, and potential investment conversions.

Finance officials emphasise that the step aligns with efforts to reduce dependence on short-term rollovers and build sustainable external buffers.

As Pakistan continues structural reforms, including fiscal consolidation and export enhancement, such bilateral settlements may pave the way for upgraded credit ratings and lower future borrowing costs.

The development underscores the evolving dynamics of Gulf-Pakistan economic partnership, shifting from emergency deposits toward longer-term investment frameworks.

Observers will closely watch reserve movements in the coming weeks and any announcements regarding reinvestment of the cleared funds.