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Instability in Pakistan increases risks for UAE, Saudi Arabia

People carrying flags of Pakistan take part in a rally to show solidarity with Pakistan's army in Islamabad on May 17, 2023, after military installations were allegedly damaged by supporters of former Pakistan's prime minister Imran Khan following his arrest last week.

Since Pakistan’s former Prime Minister Imran Khan was ousted from office in a no-confidence vote last April, the country has been embroiled in both a political and economic crisis. Volatility in Pakistani politics reached a zenith this month after the arrest of Khan on corruption charges, sparking violence in major cities across the country. 

The uproar has caused concern among Pakistan’s allies in the Gulf, particularly the United Arab Emirates (UAE) and Saudi Arabia, which have both previously pledged financial support for Pakistan as it battles extreme economic turbulence.

Partly fueling the political chaos in Pakistan is the country’s severe economic situation. Inflation has recently hit a record high of 35.4%. The Pakistani rupee has lost half its value against the US dollar in the last year alone. Perhaps most seriously for the government, Pakistan is facing an external debt crisis.

In December 2022, Islamabad’s external liabilities stood at over $126 billion. Amid an environment of higher interest rates and a stronger greenback, these dollar-denominated debts have become more expensive to service. Particularly as the country’s foreign exchange reserves dwindle — the State Bank of Pakistan announced in December that its foreign exchange reserves had fallen to a four-year low of just $6.7 billion — there are increasing concerns that Islamabad will default on its debts.

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