Tapping foreign capital

Tapping foreign capital

Pakistan entered FY27 with a somewhat stronger external position, but also with a debt burden that leaves little room for complacency. The country’s external debt stock stood at Rs24.1 trillion, or $138.85 billion, at the end of July 2026, according to the latest State Bank of Pakistan (SBP) data. The federal government’s external debt alone was $87.03bn, of which $77.2bn represented long-term obligations. The debt’s composition also tells an important story. According to International Monetary Fund (IMF) and SBP data, Pakistan remains dependent on a relatively small group of foreign creditors. About 30pc of its external debt is owed to China, with Chinese obligations approaching $30bn — nearly three times the country’s exposure to the IMF. Bilateral borrowing from non-Paris Club countries exceeds $19bn, while multilateral institutions remain the largest source of external financing. During FY26, Pakistan secured $27.2bn in foreign loans and rollovers, including $2.2bn from the IMF, $5bn in Saudi rollovers and $4bn from China, according to Ministry of Economic Affairs data. External debt maturities remain substantial relative to available reserves; Topline Research estimates actual external debt-service cash outflows during FY27 at around $11-12bn. Chinese obligations are nearly three times Pakistan’s exposure to the IMF The SBP has also substantially reduced its forward liabilities, from $5.8bn to about $950m by the end of June 2026, with officials indicating that roughly $900m remains to be settled in FY27. Over three years, the central bank purchased $28bn from the interbank market to strengthen reserves, according to SBP Governor Jameel Ahmad. Rollovers ease immediate pressure on reserves, but they do not eliminate the underlying obligation. Nor should stronger reserves be viewed independently of the liabilities that may fall due against them. Pakistan’s external position is safer when reserves rise because exports, remittances and investment generate foreign exchange, rather than because fresh borrowing temporarily replenishes the central bank’s holdings. The objective of economic policy must consequently shift from managing the next repayment date to steadily reducing the need for emergency financing and building durable external earning capacity. Against this background, Pakistan’s return to international capital markets assumes considerable importance. The country has raised $3bn through its largest-ever single international bond transaction, attracting orders of nearly $6bn from investors around the world. The issue comprised $1.75bn of 5.5-year notes carrying a 7.50pc coupon and $1.25bn of 10-year bonds carrying a 7.90pc coupon. The size of the order book is significant. Investors were prepared to offer almost twice the amount Pakistan sought to raise. For a country which only recently faced serious questions about its ability to meet external obligations, this represents an important vote of confidence. The transaction marks more than a successful borrowing exercise. Pakistan has spent the past three years trying to restore economic credibility and regain access to international capital markets. Credit-rating improvements, a more stable external account and stronger reserves have helped reopen that door. There is a temptation to celebrate a $3bn bond issue as evidence that Pakistan’s financial difficulties are behind it. That would be a mistake. A bond issue can provide foreign exchange, strengthen liquidity and restore market confidence. But it can also stop, rather than resolve, a financing problem. The real question, therefore, is not whether Pakistan can borrow $3bn today. It is whether that $3bn can help create an economy capable of generating the foreign exchange required to repay it tomorrow. Finance Minister Muhammad Aurangzeb recognises a related weakness in the domestic financial system. Speaking at an investment forum in Islamabad, he said the government was working to reduce its reliance on commercial banks to finance its fiscal requirements. This is an important admission. For decades, the government has relied heavily upon the banking system to finance its budgetary needs. Commercial banks, meanwhile, have found government securities attractive and relatively convenient investments. But when banks devote a large part of their resources to government paper, less credit is available to businesses seeking funds for expansion and investment. The government’s decision to have financial advisers structure a rupee-denominated, dollar-settled bond is part of this effort. Such instruments could widen the investor base and provide the government with another avenue for raising funds without placing the entire burden of public borrowing upon commercial banks. A modern financial system cannot depend indefinitely upon banks as the principal financiers of both government and business. Banks, bond markets, equity markets, pension funds, insurance companies, mutual funds and other institutional investors must develop together. The wider and deeper the financial market, the greater the capacity of an economy to mobilise domestic savings and attract foreign capital. The government’s interest in digital debt tokenisation points in the same direction. Pakistan is studying frameworks developed in markets such as Hong Kong, where technology is increasingly being examined as a means of making the issuance, settlement and trading of financial assets more efficient. Technology, however, is not a substitute for economic discipline. Digital bonds cannot cure fiscal deficits, increase exports or create investor confidence. They can only make markets more efficient when supported by sound institutions, credible regulation and responsible economic management. The $3bn bond issue should therefore be regarded as an opportunity rather than an achievement in isolation. The country must resist the old habit of borrowing merely to repay previous borrowing while also deepening its domestic capital markets, reducing the state’s dependence upon commercial banks, broadening the institutional investor base and encouraging the private sector to participate more actively in long-term financing. Published in Dawn, The Business and Finance Weekly, September 14th, 2026