The inflow of foreign assistance is of critical importance in financing the current account deficit in the balance of payments and meeting the debt servicing obligations on external debt to bilaterals, multilaterals, international commercial banks, and bondholders.
The ability to ensure adequate inflow of foreign assistance hinges on the country’s credit-rating with international credit rating agencies such as the Moody’s and Standard & Poor’s. Also, the existing level of foreign exchange reserves, in relation to the level of imports, is important in the assessment of risk to lending to the country by potential lenders.
Further, the umbrella of an ongoing IMF Program improves the prospects for foreign assistance, especially if Pakistan successfully completes the periodic reviews.
We assess first the success of Pakistan in 2025-26 in mobilizing the targeted level of foreign assistance. At the start of the year Pakistan’s foreign exchange reserves were at USD 14.4 billion, equivalent to an import cover of over two months.
The country’s credit ratings were low at the start of the year but improved during the year. Pakistan had entered into a three-year Extended Facility of over USD 7 billion and throughout 2025-26 completed successfully the six-monthly reviews.
The Federal Ministry of Finance had set a gross annual target of inflows of foreign assistance in 2025-26 at USD 19.9 billion. This included the continuation of time deposits of USD 5 billion by Saudi Arabia and of USD 4 billion by China. Therefore, the targeted inflow from other sources was USD 10.9 billion.
The positive outcome is that the other inflows have aggregated to USD 14.9 billion in 2025-26, thereby exceeding the target by as much as USD 4 billion.
Bilateral inflows, especially from China and Saudi Arabia, were targeted at USD 1.4 billion and the actual inflow was very close at USD 1.3 billion. Multilateral inflows were also on target at USD 5.0 billion. Similarly, the inflow by flotation of bonds was USD 1 billion. This was USD 200 million above the target.
The extraordinary inflow into Naya Pakistan Certificates was USD 2.6 billion, as compared to the target of USD 0.6 billion.
The only source of shortfall was in the inflow through borrowings from international commercial banks. The target was USD 3.1 billion, while the actual inflow in 2025-26 was USD 1.9 billion.
Overall, the year 2005-06 can be considered as an exceptionally good year of foreign assistance, with an additional flow of USD 4 billion in relation to the target of USD 19.9 billion. Consequently, the year 2025-26 saw a rise in the foreign exchange reserves from USD 14.6 billion at the end of 2024-25 to USD 19.5 billion by the end of 2025-26.
The first quarter of 2026-27 has come to an end. The annual target for 2026-27 of foreign assistance is highlighted below along with the estimated quantum of inflow in the first quarter.
The Ministry of Finance has set the annual target for inflow of foreign assistance in 2026-27 at USD 24.0 billion, including the continuation of time deposits of USD 12 billion from Saudi Arabia and China. This includes an approximately USD 4 billion financing required of the current deficit and USD 20.4 billion for meeting the possible debt servicing obligations and to facilitate further build-up of foreign exchange reserves. However, the breakup between these two heads is not given.
The big development already in 2026-27 is the raising by Pakistan of USD 3 billion through a dual-tranche Eurobond sale on September 3, 2023. This clearly highlights the further improvement in perception of credit worthiness of Pakistan.
The first tranche of USD 1.75 billion was of a 5.5 years bond at a 7.5 percent coupon rate. The second tranche is of USD 1.25 billion 10 years bond with a 7.9 percent coupon rate. Therefore, the annual interest payment on these bonds annually will be close to USD 230 million. The interest rates are high because of the continued perceptions of risk in lending to Pakistan.
Inclusive of the USD 3 billion from bonds, the total inflow of new foreign assistance in the first quarter of 2026-27 is USD 5.2 billion. Therefore, the inflow of funds from other sources has been relatively small at USD 2.2 billion.
The Federal Ministry of Economic Affairs has stopped making available the targets in 2026-27 of individual forms of foreign assistance. It is essential that these targets be specified again and made available in the monthly statements of external assistance.
The assessment of the size of different inflows is made with respect to the level of inflow in the first quarter of 2025-26. Accordingly, bilateral inflows combined were at virtually the same level at close to USD 0.3 billion.
The surprise is the 26 percent drop in inflows from multilateral institutions. There is a growing reluctance on the part of development banks like the Asian Development Bank and the World Bank to extend loans due to inadequate implementation of development projects and failure to design and execute key policy measures and reforms.
Overall, the inflow of USD 5.2 billion in the first quarter is attributable to the extent of over 60 percent to the flotation of the USD 3 billion Eurobond.
The big Eurobond flotation has facilitated an improvement in the foreign exchange reserves from USD 19.5 billion at the end of 2025-26 to USD 21.7 billion at the end of September 2026. This is above the safe level of three months’ import cover.
However, if the Middle East war persists, the current account deficit could rise significantly and put pressure again on reserves.
The flotation of bonds and commercial bank borrowings will lead to faster growth in Pakistan’s debt servicing obligations.
The focus must be on raising relatively low cost and long-term debt from bilateral sources and on improving the operating relationship with multilaterals like ADB, World Bank and IDB. This will require focus on structural reforms and efficient completion of development projects.
Also, Pakistan must prepare itself for a transition from the IMF Program by next year. Adequate reserves will need to be built up for this transition and managing the risk that some time deposits may be withdrawn from Pakistan due to absence of the IMF cover.
Copyright Business Recorder, 2026
The writer is Professor Emeritus at BNU and former Federal Minister