Bond bet: issue more before the window shuts

Pakistan has returned to the long-term international bond market with its largest-ever single issuance, raising $3 billion at respectable pricing despite difficult global conditions. As argued in this space a few weeks ago, the reopening of the market creates an opportunity that should be used while it lasts.

The objective should not simply be to borrow more. It should be to change the composition and maturity profile of Pakistan’s external liabilities by replacing shorter-tenor obligations with longer-term market debt, reducing dependence on politically sensitive bilateral rollovers and creating space to build SBP reserves.

The timing matters because the latest issuance appears closely connected to another episode in Pakistan’s increasingly complicated external liability management. The government is expected to repay the $3 billion received from Saudi Arabia earlier this year, funding that had itself arrived after Pakistan repaid roughly $3.5 billion to the UAE.

There has been some suggestion from within official circles that the Saudi facility may yet be rolled over or otherwise restructured. Even so, the IMF’s current projections for gross official reserves of around $21 billion by June 2027 suggest that significant repayments are already embedded in the external financing framework.

Pakistan should aim higher. A reserve target closer to $25 billion would move the country towards roughly four months of goods import cover and provide a more meaningful cushion against both external shocks and creditor concentration risk.

The more important objective, however, is the maturity structure sitting behind those reserves. Pakistan’s recurring external vulnerability has never simply been about the total quantum of debt; it has also been about how much must be refinanced within short periods and how dependent that refinancing is on a handful of friendly foreign partners.

Multilateral financing remains the strongest part of the external debt portfolio. Roughly half of Pakistan’s external public debt is owed to multilateral institutions depending on classification, much of it carrying relatively long maturities and concessional or semi-concessional pricing.

The problem lies elsewhere. Bilateral deposits and some commercial obligations may be cheaper than international bonds, but they often carry shorter maturities and expose Pakistan to repeated rollover negotiations whose outcome can depend as much on geopolitics as economics.

That is an uncomfortable way to finance a sovereign balance sheet. Pakistan has spent years discovering that a loan which is inexpensive on paper can become very expensive strategically when its refinancing depends on the state of a bilateral relationship at precisely the moment the country is short of dollars.

There is therefore a legitimate case for paying somewhat more to buy duration and certainty. The same principle is already shaping domestic debt management, where the government has been attempting to reduce dependence on short-dated Treasury bills and extend maturities through PIBs and other longer-tenor instruments.

Internationally, the equivalent strategy is straightforward. Pakistan should selectively replace short-term bilateral and commercial liabilities with longer-dated market instruments whenever the spread and maturity economics remain sensible.

Last week’s transaction illustrates why the opportunity deserves attention. Pakistan raised $1.75 billion through 5.5-year paper at an issue yield of around 7.75 percent and another $1.25 billion through 10-year paper at around 8.25 percent, against an order book approaching $6 billion.

Those yields are higher in absolute terms than comparable borrowing before Pakistan’s crisis. That comparison is incomplete, however, because US benchmark rates are also substantially different and Pakistan’s sovereign risk premium has compressed considerably from the levels reached during the 2022-23 balance-of-payments crisis.

More revealing is the demand. Investors were prepared to offer almost twice the amount Pakistan eventually accepted, and demand extended well into the 10-year tranche. That suggests the government still had room to raise more without immediately exhausting market appetite.

The decision to stop at $3 billion may simply reflect prudent execution. It may also have been calibrated around the Saudi repayment. Either way, it should not necessarily represent the end of Pakistan’s market activity for the year.

The government is already considering additional instruments, including Sukuk and rupee-linked, dollar-settled bonds. A diversified issuance programme would make sense if it extends maturities and replaces liabilities carrying greater rollover risk, rather than becoming an excuse for accumulating fresh debt to finance current spending.

That distinction is critical. This is an argument for liability management, not another borrowing binge. Pakistan should also avoid touching the strongest parts of its external debt structure merely for the sake of market issuance. Cheap multilateral and genuinely long-term concessional funding should remain where it is; the priority should be replacement of bilateral deposits, short-duration commercial borrowing and other liabilities that repeatedly force Islamabad back to creditors for extensions.

The potential reduction in rollover exposure is substantial. The Ministry of Finance’s own debt analysis showed short-term external debt at roughly one-quarter of the external debt stock by June 2025, an unusually large refinancing burden for an economy whose reserves had only recently recovered from crisis levels.

The recent repayment of UAE liabilities and the prospective repayment of the Saudi facility provide an opportunity to reverse that accumulation. The medium-term objective should be to bring short-term sovereign external liabilities down aggressively and prevent another build-up once memories of the last crisis begin to fade.

Geopolitics may also be helping create the present window. Pakistan’s relationship with Washington has improved materially, while successive sovereign rating upgrades and IMF-backed stabilisation have strengthened the investment case independently of politics.

How much of the current appetite reflects geopolitical signalling is impossible to establish, and Islamabad would be foolish to build a debt strategy around it. The useful conclusion is narrower: favourable political alignment can disappear much faster than debt maturities, which is another reason to secure duration when markets are receptive.

The sovereign should eventually use this improved market access for something beyond repairing its own balance sheet. A functioning Pakistani sovereign yield curve can provide a benchmark for large private-sector issuers, particularly exporters and companies investing in productive assets with natural foreign-currency hedges.

That transition matters because sovereign borrowing, however well structured, does not itself create productive capacity. Pakistan ultimately needs foreign capital to finance businesses capable of generating the dollars required to service the country’s external obligations, rather than repeatedly borrowing dollars merely to refinance earlier dollars. For now, however, the immediate task is balance-sheet repair. Pakistan has an opportunity to reduce rollover risk, extend external maturities, strengthen reserves and dilute its dependence on politically contingent financing.

Such windows have opened before and closed surprisingly quickly. The sensible strategy is to use this one while Pakistan is still being offered duration at prices it can afford.

Copyright Business Recorder, 2026