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As Abu Dhabi signals its displeasure with Islamabad, analysts say other indebted partners will be watching closely
Days before Pakistan had helped to secure a ceasefire in the Iran war this week, the United Arab Emirates was seeking repayment of a US$3.5 billion deposit from Islamabad’s central bank. The withdrawal, brushed off as a “routine financial transaction” by Pakistan’s foreign ministry, equated to roughly 21 per cent of the country’s foreign exchange reserves. It was accompanied by a wave of criticism on Emirati social media directed at Islamabad. “When our security is directly threatened, we hear diplomacy, but not clarity,” read one typical response from the UAE to a social media post by Pakistani Prime Minister Shehbaz Sharif laying out the terms of the Iran war ceasefire deal on Thursday. “Friendship is tested in moments like these. And today, many of us are simply asking: where do you stand?”
UAE law prohibits criticism of the country’s allies. The federation of seven hereditary Gulf monarchies tightly regulates social media activity and has detained scores of foreign nationals in recent weeks for posting videos of Iranian attacks online in direct defiance of government orders. Which means, analysts say, that the social media users who rounded on Sharif – accusing Pakistan of choosing diplomacy over solidarity and standing against a partner that had bankrolled Islamabad for years – were likely operating with the authorities’ tacit approval.
‘Erroneous’ suppositions
The coordinated social media pushback appeared to confirm what many in Islamabad had already surmised, despite government denials: the UAE’s decision to call in a series of matured loan deposits placed with the State Bank of Pakistan since 2019 was driven by something other than economic need.
“This is a routine financial transaction and any attempt to portray it otherwise is erroneous and misleading,” Pakistani foreign ministry spokesman Tahir Andrabi said in a statement on Saturday. “Pakistan and the UAE share a long-standing, fraternal partnership built on trust and strategic cooperation across trade, investment, defence and people-to-people ties.” Be that as it may, the UAE’s withdrawal of its deposits – reportedly requested in full by the end of this month – slashed Pakistan’s foreign exchange reserves by over one-fifth in a single stroke.
A further US$1.4 billion left on Tuesday when Islamabad repaid a Eurobond on schedule, leaving another hole in the government’s accounts with no immediately obvious options to fill it. David DesRoches, a professor of Middle Eastern and security studies at the Washington-based Thayer Marshall Institute, said the UAE’s loan recall was “not a surprise”. Since the United States and Israel launched their war on Iran on February 28, the UAE had endured “twice as many” retaliatory Iranian drone and missile strikes as any other Gulf state, he said.
Iran has also targeted oil infrastructure, US military bases and other facilities in Saudi Arabia, Kuwait, Qatar, Bahrain, Iraq, Jordan and Syria in recent weeks. But the UAE, in particular, believed it faced an existential threat and was responding accordingly, DesRoches said. “They’re doing what any rational actor would do,” he said. “The people they view as playing an unhelpful role are going to be held to account by the UAE.”
Estimates of the damage caused by the war to the UAE’s economy vary, but likely range into the hundreds of billions of dollars.
Expectations, recognition
From Abu Dhabi’s perspective, the problem with Pakistan’s mediation boiled down to “expectations and recognition during the war”, said Gedaliah Afterman, head of the Israel-Asia policy programme at the Tel Aviv-based Abba Eban Institute for Diplomacy and Foreign Relations. “Pakistan’s mediation effort appeared to give too little weight to Emirati security exposure, despite the supposedly close relationship and broader security understandings between the two sides,” he said.
The loan recall, in that reading, “is hard to ignore”, according to Afterman. “It looks less like a rupture than a signal,” he said – that partners expecting the UAE’s backing “may now be reminded that Gulf concerns must also be taken seriously in return”. Mattias Martinsson, chief investment officer of Tundra Fonder, a Stockholm-based fund manager, said it would take time for Pakistan to arrange alternative funding from China and Saudi Arabia, its closest allies and biggest bilateral creditors.
Islamabad has not reportedly reached out to Beijing and Riyadh for help as yet and may instead try to arrange for commercial loans “to plug the gap”, according to Martinsson. It could arrange up to US$1 billion in commercial bank loans to reduce the impact on its foreign exchange reserves, while the International Monetary Fund is expected to release US$1.2 billion to Pakistan in May under an ongoing programme.
If the funds were forthcoming, Pakistan could yet reach the end of its current financial year – on June 30 – with foreign exchange reserves higher than the US$14.5 billion it held a year earlier, Martinsson said.
Karachi-based economist Aqdas Afzal, a former adviser to Saudi Arabia’s finance ministry, agreed that Islamabad would not feel immediately compelled to approach Beijing or Riyadh for help. “There might be temptation to reach out to them only if there is another economic shock,” he said – especially if Islamabad found itself with no other option for raising finance through international institutions. Before the war, Pakistan had been working towards re-entering international debt markets for the first time since narrowly avoiding a Sri Lanka-style default on its external payments in 2022–23, after multiple credit rating agencies including Fitch and Moody’s upgraded the economy’s outlook to “stable”.
Martinsson said returning to international debt markets would be a viable option for Pakistan because bonds only represented 6.5 per cent of its foreign debt. By accessing international markets, it could secure competitive terms and diversify its debt profile, he added.
Keeping the receipts
Pakistan is not the only indebted country watching the UAE’s next moves with unease.Egypt, which worked closely with Islamabad and Ankara to broker the Iran war ceasefire, will be among the nations wondering if they may also face economic retaliation from Abu Dhabi, according to analysts.
Such vulnerabilities could further deepen if the fierce pre-war rivalry between the UAE and Saudi Arabia that was playing out in Yemen, Sudan and the Horn of Africa resumed in the weeks and months to come.
(From left) The foreign ministers of Saudi Arabia, Pakistan, Turkey and Egypt hold a meeting in Islamabad on March 29 to discuss regional de-escalation. Photo: Pakistan’s Ministry of Foreign Affairs/Xinhua
Kristian Coates Ulrichsen, a Middle East fellow at Rice University’s Baker Institute for Public Policy, said Egypt occupied “a bit of a unique position”, given its deep ties to both Gulf powers and their shared interest in preventing renewed instability in Cairo. But he warned that a new regional alignment of “Turkey and Pakistan drawing closer to the Saudi position, and Israel and the US remaining closely associated with the Emiratis” could yet return – and that UAE policymakers were “likely to continue pursuing their own vision of national and regional interests” once the war ended. Afterman does not expect Abu Dhabi “to turn off the money tap” on Egypt or Turkey too “bluntly or theatrically”, but instead “use finance more selectively” by tightening financing terms and delaying disbursements, among other measures. It might “reward alignment and discipline hedging, but it is more likely to do so strategically than dramatically”, he said. DesRoches was more direct. “Anybody who was involved with the UAE or beholden to the UAE” would find their life “got a lot more difficult” if Abu Dhabi concluded they had worked against its national security interests, he said. There would be “a calling of accounts”, DesRoches said, as the UAE was “keeping receipts”.
UAE pulls US$3.5 billion from Pakistan after Iran war mediation
As Abu Dhabi signals its displeasure with Islamabad, analysts say other indebted partners will be watching closely.
www.scmp.com
