EDITORIAL: The government has surprised the market by quietly re-entering the international debt capital market through the issuance of USD 750 million, including a USD 250 million green shoe option, at a coupon rate of 6.975 percent. Street talk suggests that USD 500 million is a private placement, while other investors have been asked to participate in the remaining amount.
This issuance appears to mark the start of a renewed process after a lull. Although there are uncertainties around the global economic outlook, particularly because it is unclear how long the US-Iran war ceasefire will hold, Pakistan’s image in the world is improving due to the mediation efforts the country is undertaking.
There are positive spillovers. One is renewed access to the global debt market. The bond issuance is for three years, and the government is likely to tap the market again for similar issuances. That is why the government has invited bids from international consortia to act as underwriters, lead managers, and book runners for future issuances in the global capital market over the next three years.
The finance ministry wants to open a financing channel through which funds can be arranged as and when required. That is good news, as it helps ensure that financing needs can be bridged. However, the less encouraging news is that the government’s reliance remains largely on debt flows.
Market-based flows are better than deposits from friendly countries, which only serve to boost reserves in the SBP’s pocket. In the case of foreign debt raised from capital markets or commercial banks, rupee counterparts can be created to fill the fiscal gap, which would otherwise have to be covered through domestic debt.
Domestic debt is already very high, as reverse open market operations (OMOs) have crossed Rs14 trillion. The only way to reduce this, apart from reducing government borrowing itself, is to replace domestic debt with foreign debt. That would allow net foreign assets (NFA) to grow, which would improve the monetary profile and support a better inflation outlook.
Market participants are of the view that the government should have approached the international debt market earlier, as similar rate offerings were available from Middle Eastern commercial banks. However, the debt office was looking for better rates, and the finance minister was keen on issuing Panda Bonds.
Now, however, the government is raising money from the global debt market at about 7 percent. This perhaps reflects the government’s desperation to raise funds, as its fiscal requirements are growing while external financing avenues are shrinking.
Revenue collection is likely to take a hit due to the increase in international oil prices, which means petroleum levy targets may not be met. In addition, there is usually a general slowdown in the last quarter, which may keep the FBR short of its targets. On top of that, IMF pressure to improve the domestic debt maturity profile is pushing the government to issue more fixed-rate bonds in the local market, resulting in higher yields.
To counter this, and to meet growing gross financing needs, especially as USD 4.8 billion, including UAE deposits and the Eurobond, has been repaid by the SBP, the government is returning to the international debt market.
What continues to be missing are investment flows, as FDI has almost completely dried up. The government keeps taking new loans to solve today’s problems, but in doing so it adds more problems to tomorrow’s challenges. What is needed is to put the economic house in order and leverage the improved geopolitical image to attract FDI. Without that, the country may remain trapped in debt.
Copyright Business Recorder, 2026
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