Let’s address the high rollover risk first

EDITORIAL: Ever since assuming office, finance minister Mohammad Aurangzeb has kept emphasizing the need to issue bonds in the international debt market to reduce reliance on rollovers—mainly from bilateral creditors, whose loans carry low interest rates but come with political strings attached.

The problem with market-based issuance was the government’s credit rating, which was deep in junk territory as the country was on the verge of default. Now, with stability attained through building forex reserves, reducing forward liabilities and lowering the debt-to-GDP ratio, all the major international credit rating agencies have upgraded Pakistan’s sovereign ratings from the C category to the B category.

The rating today is at the level it was in 2016–19. The quest for improvement should continue, with the aim of returning to the level seen in the early 2000s.

However, doing more of the same—running tight fiscal and monetary policies—will keep choking growth. Even with these policies, rollover risks do not decline substantially.

About a decade ago, principal repayments due within 12 months used to be USD 5–7 billion. For the past three to four years, they have hovered above USD 20 billion, peaking at close to USD 28 billion in 2025. Even after the recent decline, they remain above $20 billion.

The latest fall is partly due to bond issuance and more so to leveraging Pakistan’s improved geopolitical positioning. That effort needs to be doubled down on while the situation is in our favour. And that aligns with the Finance Minister’s objective.

Against this backdrop, the ministry of finance launched the process and issued a USD 3 billion through a landmark dual-tranche Eurobond transaction, the largest-ever international bond issuance in a single transaction. According to the finance ministry, the transaction attracted USD 6 billion in orders.

The government, however, issued USD 1.75 billion through a 5½-year Eurobond carrying a 7.50 percent coupon and a further USD 1.25 billion was raised through a 10-year Eurobond with 7.90 percent coupon.

There are, however, concerns in some quarters that the rates are very high. Some say it is ironic to have better economic conditions when US 10-year bond yields are hovering close to 5 percent. The overall international bond market is dislocated due to US–Iran-related uncertainties. The question therefore is whether we should try to issue bonds. No doubt, the risks are high.

There is, however, a counterargument that the Fed is not acting prudently, as it continues quantitative easing at exuberantly high rates. This implies that the chances of US interest rates rising in the short to medium term are high. By that logic, it is better to issue now before rates climb further.

Furthermore, Pakistan’s improved geopolitical positioning could suffer a setback going forward; thus, it is better to strike while the iron is hot. Pakistan’s existing bonds are trading at yields close to their issuance rates—its Eurobonds maturing between 2029 and 2036 have yields of 7 to 8 percent.

However, fresh issuance carries a premium, with the effective price of five-year bonds at 7.75 percent and ten-year bonds at 8.25 percent.

The rates are not bad considering the fragile global bond market, where the risks of further deterioration are high. That is why the government should issue as much debt as it can to reduce reliance on politically sensitive rollovers.

Although the rates are close to double what we are paying on rollovers, doing so would further improve our credit rating and, more importantly, reduce the country’s external borrowing risk.

The strategy may also help the private sector attract foreign capital for expansion, as the State Bank of Pakistan (SBP) is reluctant to let the private companies buy machinery and equipment using funds raised through locally issued equity and debt. Furthermore, it may also help attract foreign investors, who closely monitor short-term liabilities.

The point is that there are many other impediments that deter FDI and create friction for foreign debt capital flowing to the private sector, with high rollover risk being one of them. Let us address this while continuing to work on other reforms.

Copyright Business Recorder, 2026