Pakistan has rejected a $490 million commercial loan offered by the Islamic Development Bank Group due to its high financing cost. The decision reflects the government’s efforts to secure external funding on more affordable terms while managing substantial national borrowing requirements.
The one-year facility came from the International Islamic Trade Finance Corporation (ITFC), the bank group’s trade financing arm. However, the Finance Ministry’s Debt Management Office declined the offer last week because the proposed overall borrowing cost exceeded its target.
Government Seeks More Affordable Financing
Pakistan had aimed to secure financing at an interest cost of approximately 6 percent. In contrast, the proposed facility carried an estimated overall cost of around 8 percent, making it less attractive to officials.
Furthermore, the proposed rate exceeded the approximately 6.1 percent yield on Pakistan’s bond maturing in December 2027. Consequently, the government instructed the Economic Affairs Division to explore alternative financing options through ITFC or other lenders offering competitive terms.
The rejection highlights the importance of borrowing costs as Pakistan works to meet its financial obligations. Nevertheless, the country continues to require substantial funding to support its budget and repay maturing debt.
Pakistan Faces Substantial Borrowing Requirements
According to the Finance Ministry’s borrowing plan for fiscal year 2026-27, Pakistan’s gross financing needs stand at Rs28.647 trillion, equivalent to approximately 20 percent of gross domestic product. This figure includes a federal fiscal deficit of around Rs7 trillion and more than Rs21 trillion in domestic and external debt maturities.
Meanwhile, the government projects net external financing at Rs813 billion, equivalent to approximately $2.8 billion. Multilateral lenders are expected to provide a significant share of this funding.
The rejection follows Pakistan’s acquisition of a separate $300 million commercial loan through United Bank Limited in August. The government granted an income tax exemption on the bank’s profits associated with that financing.
International Borrowing Costs Remain Elevated
Pakistan also raised $3 billion through Eurobonds in September, including a five-and-a-half-year bond carrying a 7.5 percent coupon and a 10-year bond carrying a 7.9 percent coupon.
As international borrowing costs remain elevated, the government must balance immediate financing needs against long-term debt sustainability. Therefore, officials are seeking alternative funding arrangements with more favourable terms.
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