UAE's sudden loan repayment demand from Pakistan and the India connect

The United Arab Emirates’ decision to demand the return of its funds from Pakistan, even as Islamabad reportedly repaid $3.45 billion, has raised eyebrows, especially amid the ongoing tensions in West Asia.

The sudden move is being seen as a sign of a growing rift between the two long-time allies.

The State Bank of Pakistan, last week, confirmed that $1 billion was repaid to the Abu Dhabi Fund for Development on April 23, following an earlier repayment of $2.45 billion.

The funds were part of a financial support package extended by the UAE in 2019 to help stabilise Pakistan’s balance of payments.

In March, Islamabad failed to secure a rollover of the $3.5 billion facility from Abu Dhabi for the first time in seven years.

While Pakistan’s foreign exchange reserves remain under strain, they are still being managed as part of a broader stabilisation programme backed by IMF reforms. Islamabad, however, termed it as a “routine financial transaction". The timing and urgency of the demand by UAE apparently surprised both Pakistani officials and the IMF.

According to a Financial Times report, the UAE’s move reflects "frustration" with Pakistan’s foreign policy choices, particularly its response to the ongoing conflict involving Iran.

“Pakistan’s role as mediator in US’ war against Iran also annoyed the Gulf state as it sees things in kind of black and white at the moment,” Neil Quilliam, an associate fellow at Chatham House, told FT.

He added that the UAE sees little scope for neutrality in the current situation, while Pakistan has tried to position itself as a mediator, choosing a “middle ground”.

The report also pointed to Abu Dhabi’s discomfort with Islamabad’s growing closeness to Riyadh, especially after Saudi Arabia stepped in to help Pakistan manage its finances. Earlier this month, Pakistan received $2 billion from Saudi Arabia’s Ministry of Finance to support its foreign exchange reserves and bridge the gap linked to the UAE repayment.

At the same time, tensions between the UAE and Saudi Arabia have also been rising, particularly over differences in the Yemen conflict, where both back rival sides.

The India connect

Quilliam also noted a broader strategic shift, saying the UAE is increasingly prioritising ties with India. “... and the UAE is much more invested in India anyway. They see this growing alliance between the Saudis and the Pakistanis, and for the UAE that constitutes a conflict of interests for Abu Dhabi,” he said.

Pakistani advisers told the Financial Times that Abu Dhabi had expected a stronger stance from Islamabad against Iran. “There is frustration in Abu Dhabi,” said Emirati academic Abdulkhaleq Abdulla. “They [Islamabad] sought to position themselves as a mediator which didn’t go down well.”

“However, being upset is one thing, but rethinking the relationship after all this is said and done is something else,” he added.

Despite public denial from Pakistan’s foreign ministry, officials in Islamabad privately expressed concern over the development. Some, however, viewed it as an opportunity to reduce dependence on the UAE, particularly as Abu Dhabi strengthens its ties with India.

“The Saudis obliged our request, which they usually do. We could see it coming after their [Riyadh’s] rift with the UAE,” FT reported, citing a source.

This has strained what has historically been a close Pakistan-UAE relationship. It has also increased Islamabad’s reliance on Saudi Arabia, whose support now makes up nearly half of Pakistan’s central bank reserves.

However, the report noted that Riyadh has shown limited willingness to expand its financial backing into broader investments, despite a new defence pact between the two countries.