Pakistan continues to face extraordinary pressure to ensure large and sustained inflows of external financing. The foreign exchange reserves are at a moderately high level but have remained virtually unchanged at USD 14.5 billion since June 2025.
The first four months of 2025-26 have also witnessed a big change in the current account of the balance of payments. It has worsened from a deficit of USD 206 million in the first four months of 2024-25 to a deficit of USD 735 million in the corresponding period of the current financial year.
The Ministry of Economic Affairs has fortunately developed a system of monitoring the inflows of foreign economic assistance. Monthly reports showing the monthly and cumulative inflows are prepared and made publicly available.
The monthly report showing the inflows from July to October 2025 has been released recently. The information system developed by the Ministry of Economic Affairs is of a very high quality. The annual target and the actual monthly inflows are reported of various sources of credit and loans.
The multilateral sources include the various international development finance institutions like the Asian Development Bank, World Bank and the Islamic Development Bank. Bilateral sources, which are monitored, include especially Saudi Arabia, with the oil facility, China and a number of developed countries. Private inflows are in the form of flotation of bonds, loans from international commercial banks and purchases of Naya Pakistan certificates. The status of time deposits by Saudi Arabia and China with the SBP (State Bank of Pakistan) are also monitored.
The budget estimate of the total inflow of external financing is USD 19,922 million. It includes the continuation of the time deposits of USD 9 billion by Saudi Arabia and China, plus new inflows of borrowing amounting to USD 10,922 Million. The requirement of financing is that the current account deficit will not exceed USD 1.5 billion. Given the big increase in the deficit, it is likely to be closer to USD 2.5 billion.
The breakup of financing anticipated of the new financing in 2025-26 is USD 5,041 million from multilateral sources, USD 1,362 million from bilateral sources and USD 4,109 million from bonds, foreign commercial banks and Naya Pakistan certificates. Pakistan is also expected to receive USD 400 million worth of SDRs from the IMF.
The fundamental question is how large have the actual inflows been in relation to the budget estimate? On the assumption of regular monthly inflows, the expectation is that on average the total new inflows should have been one-third of the annual target of 2025-26.
Unfortunately, this is not the case. The total magnitude of new inflows is USD 2,292 million, equivalent to only 21 percent of the annual target. The shortfall in multilateral and private inflows is the largest.
The worrying finding is that while the expected level of borrowing from foreign commercial banks is as high as USD 3,100 million, compared to USD 1,000 million in 2024-25, no loan has been contracted in the first four months. Despite some improvement in Pakistan’s credit rating, there is no new private financing up to now in 2025-26. The path of inflows from this source will need to be ensured and closely monitored in coming months. They are of importance from the viewpoint of preventing any big drawdown in foreign exchange reserves.
A flotation of USD 400 million of bonds is also envisaged in 2025-26. This has also not happened yet. Presumably, the launch of the Panda Bond in the Chinese domestic market will take place shortly.
Another matter of concern is the slowdown in inflows from multilateral institutions. During the first four months, the receipt of loans from the Asian Development Bank is only 9 percent of the annual budget estimate by the Ministry of Economic Affairs. Similarly, the World Bank has extended-up till October only 24 percent of the annual target. The Islamic Development Bank has been more active and already disbursed over 47 percent of the annual target.
Within bilateral funds, there was a time when there used to be substantial disbursement of funds by China under the CPEC. However, China has largely stopped funding projects in Pakistan and the expectation is that it will disburse only USD 37 million in 2025-26. The major source of bilateral financing will continue to be Saudi Arabia through the oil facility of USD 1 billion. Already, USD 400 million have been disbursed from this source.
Overall, the situation with regard to inflow of external financing remains fragile. The Ministry of Finance has also made a worrying projection of net external receipts for 2025-26. It expects marginal net financing, with gross external receipts of Rs 5,777 billion and repayments of Rs 5,672 billion. In the event there continues to be a shortfall in new external inflows, there will be negative external financing of the budget deficit. This will put pressure not only on domestic borrowing by the federal government but could also imply a significant drawdown of foreign exchange reserves.
The key source of risk in the projected level of external financing is the private financing of USD 3,500 billion in the form of loans by international commercial banks and bonds. This is augmented by the larger current account deficit caused partly by the floods. Rice exports are down and there is likely to be need for substantially higher imports of cotton and wheat.
Given the higher risk perceptions, the policy of the SBP of preserving the nominal exchange rate does not appear to be appropriate. Already, the real effective exchange rate has risen to 104. Appropriate steps will need to be taken to promote exports to prevent excessive widening of the current account deficit and to at least partly compensate for any shortfall in external financing.
Copyright Business Recorder, 2025
The writer is Professor Emeritus at BNU and former Federal Minister
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