Pakistan Rejects $490m Loan Over High Cost
Pakistan has turned down a $490m loan proposal by the Islamic Development Bank Group because of higher interest rates, at a time when gross financing needs stand at around 20 per cent of the size of the economy. The facility was offered by the bank’s trade finance arm, the International Islamic Trade Finance Corporation, for a period of one year.
Government officials said the decision to refuse the facility was taken last week. The finance ministry spokesperson did not respond to a request for comment about the decision.
Why the debt office refused the $490m loan
The Debt Management Office of the finance ministry took the decision because of the higher cost of the loan. The office has been working without a permanent director general since January this year.
The debt office had hoped for an interest cost of around six per cent. The sources said the trade finance corporation’s offered all-in cost of about eight per cent was higher than the December 2027 maturing bond, which was trading at 6.1 per cent.
The finance ministry has now asked the Economic Affairs Division to look for a new loan facility, either from the trade finance corporation or any other source, at competitive rates.
The decision came a couple of months after Pakistan took a $300 million loan from United Bank Limited, which originated the amount from Bahrain and Dubai in August this year. The government obtained that loan by waiving income tax on the profits the bank would earn by extending it.
How the decision fits Pakistan’s borrowing plan
Pakistan’s gross financing needs, including external requirements, remain high. The International Monetary Fund has projected a current account deficit higher than official estimates, at one per cent of gross domestic product, or nearly $4.5 billion. That is at least $1.5 billion higher than the $2.5 billion to $3 billion figure pitched by the Pakistani authorities during recently concluded talks.
In the same report released this week, the IMF showed Pakistan’s gross financing needs around 22 per cent of GDP for the last fiscal year, which finance ministry officials found on the higher side. Under the finance ministry’s annual borrowing plan for fiscal year 2026-27, total gross financing needs are projected at Rs28.647 trillion, about 20 per cent of GDP.
This total includes a federal fiscal deficit of Rs7 trillion and, after adding domestic and external maturities, more than Rs21 trillion. Net external financing is projected at Rs813 billion, equal to $2.8 billion, after repaying maturing debts, which suggests actual borrowings will be higher.
The finance ministry is betting on inflows from multilateral lenders, expected to be the primary external funding source for $1.6 billion net lending to meet these requirements.
What Pakistan paid for recent market borrowing
In September this year, the government raised $3 billion through Eurobonds at interest rates higher than those Pakistan paid in 2021 against five- and 10-year Eurobonds. The finance ministry raised $1.75 billion through a five-and-a-half-year Eurobond at a coupon rate of 7.5 per cent, while the actual interest rate on the five-year transaction was 7.75 per cent. It also raised $1.25 billion through a 10-year Eurobond at a 7.9 per cent face value interest rate.
A key reason behind relatively low interest rates on the debt raised in 2021 was that United States Treasury rates were very low, ranging from one per cent on five-year bonds to 1.64 per cent on 10-year bonds. Current United States Treasury rates are over five per cent because of geopolitical and economic uncertainty.
The government has also processed the income tax exemption for a foreign-origin commercial loan of $300 million. A finance ministry official said foreign commercial loan facilities have been offered on the condition that taxes applicable in Pakistan will not be borne by the lenders, and that the tax was either to be borne by the government or an exemption granted. The law empowers the federal cabinet to waive these taxes, which eventually have to be paid from the budget, as it was direct borrowing by the finance ministry.
Feature Pakistan earlier reported Finance Minister Muhammad Aurangzeb pointing to a fiscal deficit at a 22-year low, with three primary surpluses in a row. The refusal of the $490m facility fits that stance: the government is signalling it will not pay any price for commercial borrowing, even as its financing needs stay large.
