UAE’s $3.5bn demand from Pakistan: Is there an India factor?

Pakistan’s already fragile economic situation has been jolted by a sudden demand from the United Arab Emirates (UAE) to return roughly $3.5 billion held in its central bank reserves.

The development has created immediate financial pressure on Islamabad. The episode unfolds as Pakistan attempts to position itself as a mediator in the conflict involving the United States, Israel, and Iran.

What triggered the UAE’s demand for repayment?

The request from Abu Dhabi earlier this month for the return of approximately $3.5 billion came as a surprise to Pakistan’s economic managers.

The sum represented a significant portion of the country’s foreign exchange reserves — estimated at around $16 billion to $16.4 billion in late March — amounting to roughly 18 to 21 per cent of the total.

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This demand also caught the attention of the International Monetary Fund (IMF), which had earlier secured assurances that such bilateral deposits would remain in place until the completion of Pakistan’s $7 billion programme in 2027.

The IMF programme requires Pakistan to maintain specific reserve thresholds, including a target of exceeding $18 billion by mid-2026.

Pakistan’s foreign ministry attempted to downplay the development, describing it as a “routine financial transaction” and rejecting suggestions of any deterioration in ties with the UAE or a connection to ongoing regional tensions.

However, individuals familiar with internal discussions in Islamabad indicated that the move was unexpected and caused concern within policymaking circles, reported The Financial Times (FT).

Prior to the repayment demand, Pakistan had been seeking to extend or roll over at least $2 billion of Emirati deposits for a longer duration. Instead, starting in January 2026, the UAE had shifted to granting only monthly extensions, a change that signalled a potential reassessment of its financial engagement with Islamabad.

The eventual decision to demand full repayment marked a sharp escalation.

Did Pakistan’s stance on the Iran conflict play a role?

Islamabad had taken on a mediatory role, attempting to facilitate de-escalation, a stance that appears to have caused unease in Abu Dhabi.

Neil Quilliam, an associate fellow at Chatham House, pointed to a fundamental divergence in approach. “There’s no neutrality in this [from the UAE perspective], there’s no middle ground and if you’re mediating then you are in the middle ground,” he told FT.

From the UAE’s perspective, the situation may have been viewed in more binary terms, particularly given the direct security challenges faced by Gulf states during the conflict.

Iranian missile and drone attacks targeted infrastructure in the region, including in Saudi Arabia, raising concerns among Gulf governments about the adequacy of support from partners.

Pakistani advisers indicated that Abu Dhabi had conveyed a preference for Islamabad to adopt a more explicit stance against Iran. Instead, Pakistan continued to emphasise diplomacy, which may have been interpreted as insufficiently supportive in a period of heightened tension.

Abdulkhaleq Abdulla, an Emirati academic and commentator, acknowledged dissatisfaction in Abu Dhabi. “There is frustration [in Abu Dhabi],” he told FT, adding, “They [Islamabad] sought to position themselves as a mediator which didn’t go down well.”

At the same time, he noted that such frustration does not necessarily translate into a long-term rupture. “However, being upset is one thing, but rethinking the relationship after all this is said and done is something else.”

Public reactions within the UAE also reflected discontent. Social media posts criticised Pakistan’s approach, an unusual development in a tightly regulated digital environment.

Is Saudi Arabia aiding Pakistan?

The immediate financial gap created by the UAE’s demand required urgent intervention. Saudi Arabia responded by committing $3 billion in additional support, aimed at strengthening Pakistan’s balance of payments position.

This assistance came alongside the extension of an existing $5 billion deposit, which was rolled over for a longer period.

Pakistan’s finance minister Muhammad Aurangzeb confirmed the arrangement. A Saudi finance ministry spokesperson also confirmed the deposit, underscoring Riyadh’s role in providing economic support to Islamabad.

The timing of this assistance was critical. With Pakistan obligated to meet IMF conditions and maintain reserve levels, the Saudi funds helped offset the immediate impact of the UAE repayment. The support also contributed to stabilising market sentiment, with Pakistan’s international bonds strengthening following the announcement.

Saudi Arabia has a history of providing financial assistance to Pakistan during periods of economic stress.

In 2018, for instance, Riyadh announced a $6 billion package that included a $3 billion deposit and deferred oil payment facilities of an equivalent amount. The latest intervention continues this pattern of support.

At the same time, Pakistan is exploring other financing options, including the issuance of Eurobonds and access to commercial borrowing, as part of a broader strategy to manage its external obligations.

The financial assistance from Saudi Arabia is closely linked to the broader strategic relationship between the two countries, which has deepened in recent years. In 2025, Riyadh and Islamabad signed a mutual defence agreement that treats an attack on one as an attack on both.

Pakistan has deployed fighter aircraft and support personnel to Saudi Arabia following Iranian attacks on key energy infrastructure. The deployment was carried out under the framework of the defence agreement, reflecting the operational dimension of the partnership.

However, analysts have raised questions about the effectiveness of such arrangements. Bernard Haykel, a professor at Princeton University, observed, “The Saudis never had any illusions about Pakistani help and were simply hoping Iran would think twice before attacking them. This proved wrong.”

Speaking to FT, he added, “Saudi cannot afford to bail out Pakistan.”

Additionally, despite expectations that the defence pact would lead to increased Saudi investment in Pakistan, progress has been limited.

Saudi Arabia itself faces fiscal pressures, including rising domestic spending commitments and budgetary constraints, which may restrict its ability to expand economic engagement abroad.

Are Gulf rivalries influencing Pakistan’s situation?

While both Saudi Arabia and the UAE share common security concerns, particularly regarding Iran, differences have emerged in their regional strategies.

Tensions between Riyadh and Abu Dhabi became more visible in recent months, particularly over their respective roles in the conflict in Yemen, where they have supported different factions. Although the Iran conflict temporarily aligned their interests, underlying disagreements have not been fully resolved.

Analysts suggest that Pakistan has become one of the arenas where these differences are playing out. Saudi Arabia’s closer alignment with Pakistan — along with its ties to countries such as Turkey and Egypt — contrasts with the UAE’s broader strategic orientation.

Quilliam highlighted this divergence, noting that the UAE is “much more invested in India anyway,” while also perceiving the strengthening Saudi-Pakistan relationship as a potential source of friction. He added that the evolving alignment could create competing interests for Abu Dhabi.

For Pakistan, navigating these rivalries presents a significant challenge. Maintaining strong ties with both Gulf powers has long been a cornerstone of its foreign policy, but shifting regional dynamics are making this balance more difficult to sustain.

How does India factor into the UAE-Pakistan equation?

Over the past decade, Abu Dhabi has significantly increased its economic and strategic engagement with New Delhi, positioning India as a key partner in trade, investment, and regional connectivity.

This growing partnership has implications for Pakistan, which has historically relied on strong ties with Gulf states for economic support.

Analysts note that the UAE’s deeper involvement with India may influence its approach to Pakistan, particularly in areas where strategic interests diverge.

Quilliam’s observation that the UAE is “much more invested in India anyway” points to this shifting balance. As Abu Dhabi strengthens its links with India, Pakistan may find itself competing for attention and resources in the Gulf.

At the same time, the UAE’s longstanding relationship with Pakistan remains significant. Since its formation in 1971, the UAE has maintained close ties with Islamabad, supported by extensive economic cooperation and a large Pakistani expatriate community of approximately 1.5 million people.

Pakistan has also contributed to the UAE’s development, particularly in the early years. Pakistani personnel played a key role in building the Emirati air force, and Pakistan International Airlines provided aircraft and training support to what would later become Emirates airline.

Despite this history, differences have surfaced periodically. In 2015, Pakistan’s decision not to participate in the Saudi-led coalition in Yemen drew criticism from the UAE, reflecting differing priorities in regional conflicts.

What are the economic implications for Pakistan?

The repayment to the UAE has immediate and longer-term economic consequences for Pakistan. In the short term, it has reduced the country’s foreign exchange reserves and increased pressure on its external financing position.

The development has also disrupted planned financial arrangements. A proposal to convert $1 billion of UAE debt into investment in the Fauji Foundation — a military-linked conglomerate — has been abandoned, with the funds instead used to meet repayment obligations.

To comply with IMF requirements, Pakistan must rebuild its reserves and maintain fiscal discipline. The Saudi support provides temporary relief, but additional measures will be needed to achieve the programme’s targets.

Pakistan’s reliance on external financing remains a concern. With a significant portion of its reserves now linked to Saudi deposits, questions arise about diversification and sustainability.

The country’s ability to access international capital markets, attract foreign investment, and implement structural reforms will be critical in the coming months.

With inputs from agencies