Pakistan’s external debt has climbed to nearly $130 billion, with over half of it denominated in US dollars, according to the government’s latest Debt Management Strategy (DMS) for 2026–2028. The report highlights the country’s heavy dependence on a few major currencies, raising concerns about vulnerability to global economic fluctuations.
The DMS breaks down the debt composition: the US dollar dominates with 57.8%, followed by Special Drawing Rights (SDRs) at 29.88%. Other currencies include the Chinese Yuan (5.21%), Japanese Yen (3.95%), and the Euro (2.62%). This concentration exposes Pakistan to potential exchange rate risks, especially amid ongoing international market volatility.
Government Pushes for Diversified Borrowing
To ease pressure on its external financing, Pakistan is pursuing a broader borrowing strategy. While multilateral and bilateral loans with concessional terms will continue to form the backbone of external debt, authorities are also exploring international capital markets through new instruments like Panda Bonds, Sustainable Bonds, and Eurobonds.
A $1 billion Panda Bond program is already in the works, with the first tranche of $200–250 million expected in FY2026. Denominated in Chinese Renminbi and issued in China, these bonds aim to lower borrowing costs, reduce refinancing risks, and strengthen financial ties between Pakistan and China.
In parallel, the government is preparing to introduce Sustainable Bonds under a new Sustainable Financing Framework, which is currently under cabinet review. This framework will determine the structure, maturities, and repayment schedules of future green or sustainability-linked bond issuances.
Eyeing Eurobond Markets Amid Global Uncertainty
Pakistan’s access to Eurobond markets has been limited since 2022 due to unfavorable global conditions. The DMS signals a cautious plan to re-enter these markets once economic indicators and investor sentiment improve, offering the potential for diversified funding sources and longer-term debt solutions.
Managing Currency Risk and Exploring Innovative Solutions
To shield the economy from foreign exchange risks, the government plans to use hedging tools and develop domestic markets for futures and interest rate swaps. Debt-for-nature swaps are also under consideration, offering a creative way to link financial relief with environmental goals, reflecting a growing trend of sustainable debt management worldwide.
Domestic Debt Remains Key for Financing
On the home front, domestic borrowing will continue to be a primary source of government financing over the next few years. Under the IMF program, government guarantees are capped at Rs. 5,600 billion by June 2025. As of March 2025, Rs. 405 billion in new guarantees had been issued—equivalent to 0.35% of GDP—bringing the total outstanding guarantees to Rs. 4,548 billion.
These guarantees largely support state-owned enterprises such as the Trading Corporation of Pakistan (TCP) and the Pakistan Agricultural Storage and Services Corporation (PASSCO), particularly for commodity-related financing.
Takeaway
Pakistan’s debt management strategy reflects a balancing act between meeting immediate financing needs and building resilience against global market shocks. While reliance on traditional borrowing persists, new instruments and innovative mechanisms suggest a gradual shift toward more diversified and sustainable financing.
