I don't think Pedro has declined in quality, he's still capable of playing great football. Say what you want but he was is incredible form during an extended period of last season but was benched unfairly.
The main issue is that he is a confidence player and he relies on that more than any other aspect of his game. I am more than willing to bet that if you put Pedro under a coach like Pep or Mou, he would be firing on all cylinders again.
That being said, I can understand why the club wants to renew him. It's just a matter of if they believe they can give him the proper motives to be the player that he used to be.