Foreign loans

EDITORIAL: The Senate Standing Committee on Economic Affairs warned the Economic Affairs Division (EAD) that inflated project costs, over-invoicing and poor planning are bleeding billions from the Treasury, and counseled the Division to discourage contracting new external loans. One would assume that this advice is focused on project assistance and/or reforms in a particular institution (past examples include judicial and Federal Board of Revenue reforms).

Delays in project implementation are frequent in Pakistan, which significantly raise the total cost of the project — a rise attributable to not only sectoral inefficiencies but also due to the persisting inability of the government to effectively deal with a narrow fiscal space that, in turn, inhibits the allocation of the necessary counterpart funds. This led the International Monetary Fund in its last three loans to Pakistan (from 2019 onwards including the ongoing programme) to insist that the government must prioritise budgeted public sector development outlay with money to be disbursed for only those projects that are near completion. This accounts for the government disbursing a very small percentage of what it budgets for development projects and hence the insurmountable problems facing foreign-funded projects as identified by the Senate Standing Committee have limited applicability.

However, if one also takes account of programme/budget support loans then it is relevant to note that Pakistan’s trade deficit has widened due to the continued prevalence of the boom-bust cycle (largely the outcome of flawed monetary and fiscal policies) with July-January 2026 exports declining by 5.5 percent while imports rose by 9.8 percent against the comparable period the year before. And, in spite of a significant rise in remittances during the period under review, the current account deficit swelled to negative USD 1,074 million as opposed to positive USD 564 million in the comparable period the year before.

Given that petroleum and products constitute the bulk of our imports our trade deficit is expected to further widen if the war in the Middle East continues in view of the fact that after only two days of hostilities international oil prices have spiked by 10 percent. What is even more disturbing for Pakistan is that senior traders have halted oil shipments through the Strait of Hormuz which, subsequent to radio hailing by the Islamic Revolutionary Guard Corps (IGRC) declaring the Strait closed, have halted shipments though some traffic is still flowing. It, therefore, must be appreciated that the Prime Minister has set up a committee, to be headed by the Minister of Finance, to monitor the impact of the volatility of oil prices on Pakistan’s economy and to devise a mitigating strategy.

Notwithstanding any adverse impact on the Pakistan’s economy of any volatility in the international oil prices, there is little likelihood of reducing reliance on foreign loans, given that the current year’s budget has earmarked nearly USD 20 billion external financing while foreign exchange reserves remain largely debt-based, including USD 12 billion annual rollovers by the three friendly countries.

EAD’s website notes that it is responsible for “assessment of requirements, programming and negotiations of external economic assistance related to the Government of Pakistan and its constituent units from foreign governments and multilateral agencies.” The Division comes under the administrative control of the Ministry of Finance, which takes the final informed decision on how much external loans to procure premised on the projected budget deficit, capacity to pay back the interest and principal on loans as and when due and the foreign exchange reserve situation. One would hope that the Ministry takes the Cabinet on board in its drive to reduce dependence on foreign loans, which would almost certainly require belt tightening; specifically, with reference to curtailing current expenditure.

Copyright Business Recorder, 2026