Pakistan should borrow long while its stock is high

Pakistan’s external accounts have absorbed a war without breaking. Nearly six months into the conflict between Iran and the US, with the petroleum import bill inflated by soaring crude prices, the current account remains remarkably contained.

FY26 ended with only a marginal deficit, while the deficit in July narrowed to $328m despite elevated energy imports. Resilient remittances and stronger services exports have absorbed much of the shock. For an economy that came within weeks of default in early 2023, that is a considerable achievement.

The fiscal picture is no worse. The deficit narrowed to 2.6 percent of GDP in FY26, the smallest since 2004, and the budget recorded a primary surplus for the third consecutive year. Even the war quarter held: the deficit for the final three months of the fiscal year came in at 1.9 percent, the lowest fourth-quarter reading in nine years.

The stock numbers have moved with the flows. Public debt has fallen sharply as a share of GDP from its FY23 peak, with the external component declining faster. Total external debt and liabilities have similarly dropped from more than 43 percent of GDP in FY23 to around 30 percent. Reserves held by the State Bank of Pakistan stand at about $17.1bn, against a low of $3.1bn in January 2023.

Yet none of this has produced an economy that grows. Investment is hovering near its lowest share of GDP on record. Output has not expanded by more than 4 percent in any year since FY22.

Unemployment is rising, poverty remains elevated and a substantial share of households still earn less in real terms than they did in 2019. Pakistan has stabilised itself into stagnation.

The mechanism that produces this result is not mysterious. Government borrowing has absorbed much of the balance sheet capacity of the domestic banking system, leaving limited space for everyone else. The central bank, wary of credit expansion that pulls in imported plant and machinery, has little appetite for a domestic investment boom that threatens the reserve position.

Firms requiring large amounts of capital are therefore increasingly pushed towards foreign financing. Foreign lenders, looking at Pakistan’s sovereign risk profile, hesitate. The same risk premium deters direct investors. The circle closes.

What keeps it closed is not simply the size of external debt, nor even its average maturity. Pakistan’s external public debt already has an average maturity of more than six years.

The problem is the concentration of foreign exchange obligations that repeatedly fall due within a twelve-month horizon. Short-term external outflows, overwhelmingly deposits, commercial facilities and bilateral rollovers, were only $5bn-$7bn a decade ago. They deteriorated steadily thereafter and peaked at $28.7bn in August 2025.

Improved geopolitical standing and stronger reserves have since bought some relief, with the figure falling from $27.6bn in March 2026 to $20.7bn in July. The direction has changed. The level has not.

The composition of financing compounds the problem. Pakistan’s reliance on international bonds has declined while multilateral financing has expanded. That is not inherently undesirable.

Multilateral money is generally cheaper, longer-dated and precisely the kind of financing a vulnerable sovereign should maximise. But it also arrives with policy conditions, programme timetables and limited discretion. More importantly, concessional financing cannot substitute for a diversified market funding base. Pakistan needs both.

The remedy is therefore not to replace multilateral debt with expensive bonds. It is to replace rollover-dependent financing with duration. Islamabad should return to international capital markets with long-dated issuance, using the improvement in its credit standing to lengthen the horizon over which foreign exchange obligations must be refinanced.

Coupons will exceed what the multilaterals charge. That is a term premium Pakistan should be willing to pay where the alternative is an obligation that must be renegotiated every twelve months.

Market debt carries no policy conditionality, and a bond that matures in ten years does not have to be rolled over annually with a creditor who may also have views on foreign policy.

The government’s own debt strategy recognises much of this. It envisages a gradual return to Eurobond markets, alongside international sukuk and Panda bonds, while explicitly seeking to reduce refinancing risk.

The finance ministry has already appointed international banks for its global medium-term note and sukuk programmes. The direction is correct. What is still missing is the scale and purpose.

Market access should not merely become another source from which Islamabad plugs the annual financing gap. It should be used deliberately to reshape the external balance sheet.

That distinction matters. Pakistan should not issue expensive ten-year dollars simply to park the proceeds at SBP and manufacture a larger reserve number. It should borrow long to refinance short.

Over the next three to four years, a reasonable objective would be to replace $10bn-$15bn of rollover-dependent external financing with long-duration market debt, while allowing reserves to build towards $30bn through sustained foreign exchange inflows.

The gain comes from pushing out the refinancing cliff, not from borrowing at 8 or 9 percent to earn substantially less on idle reserves.

A less threatening sovereign maturity profile would not suddenly make every Pakistani project bankable. But it would reduce the country-risk premium hanging over every private borrower.

Lenders could begin evaluating mining, minerals, manufacturing and infrastructure projects on their own economics rather than treating the sovereign’s next twelve months of financing needs as the first credit question. Greenfield investment could proceed without every imported turbine being viewed primarily as a drain on reserves.

SBP could accumulate buffers through capital inflows rather than through the suppression of investment and imports.

The case for acting now is political as much as financial. Pakistan’s standing has improved sharply on the back of its role in defusing the regional conflict, while its fiscal position and external buffers are stronger than they have been for years. Both advantages are perishable.

Diplomatic capital decays, oil prices move and windows in emerging-market debt close without notice. Pakistan has spent three years rebuilding its credibility. The finance ministry should now convert some of that credibility into duration while the market is still willing to price it.

Copyright Business Recorder, 2026