A subtle but significant shift is underway in Pakistan’s debt strategy. Islamabad is seeking to reduce its dependence on bilateral lenders by raising billions of dollars through international bonds and commercial borrowing. Islamabad is preparing one of its most aggressive pivots in external debt strategy in years. For fiscal year 2026-27, which begins July 1, Pakistan plans to raise $4.53 billion through commercial channels, international bonds and foreign commercial bank loans, as it tries to wean itself off the short-term bilateral lending that has kept it financially afloat through repeated balance-of-payments crises.
A Fivefold Jump in Bond Market Borrowing
According to FY27 budget documents, Pakistan intends to raise Rs580 billion (about $2.08 billion) from international bond markets, more than five times this year’s target of Rs116 billion ($417 million). On top of that, the government plans to borrow Rs681.5 billion ($2.45 billion) from foreign commercial banks, pushing total commercial external borrowing for the year to roughly $4.5 billion.
This commercial financing forms part of a much larger external funding requirement: Islamabad is targeting Rs5.54 trillion ($19.9 billion) in total foreign financing for FY27, a 26 percent jump from the Rs4.41 trillion ($15.9 billion) targeted for the outgoing year. Finance Minister Muhammad Aurangzeb has said the bond pipeline could include additional Panda Bonds, Eurobonds, dollar-denominated instruments, and a first-of-its-kind rupee-linked, dollar-settled bond, though final deal sizes have not yet been set.
Diversifying Away from Bilateral Debt
The strategy isn’t about taking on more debt, officials insist, it’s about changing who holds it. Aurangzeb has framed the plan as testing how much bilateral financing can be replaced with market borrowing while keeping Pakistan’s overall external debt stock unchanged. Adviser to the Finance Minister Khurram Schehzad has described it as a continuation of a long-standing goal to broaden the country’s investor base rather than a sudden policy shift.
The numbers explain the urgency. Pakistan’s external debt rose to $138 billion by March 2026, up from $136 billion a year earlier, per the planning ministry’s Annual Plan 2026-27. Meanwhile, FY27 foreign debt repayment obligations are projected at Rs1.1 trillion ($3.9 billion), 15 percent higher than what was repaid in the outgoing fiscal year. Notably, the FY27 budget does not allocate any expected receipts from the Saudi Fund for Development’s oil facility, Saudi Arabia’s SAFE deposit scheme, or its time-deposit facility, suggesting Islamabad may be stepping back from additional bilateral support next year.
That caution follows a tense episode earlier in 2026: the UAE called in repayment of its $3.45 billion bilateral loan in April, forcing Pakistan to lean on Saudi Arabia for a fresh $3 billion deposit to plug the gap. Pakistan still holds more than $10 billion in deposits from Saudi Arabia and China, underscoring how dependent its reserves position remains on a handful of Gulf and Chinese relationships, exactly the concentration risk the new borrowing strategy is meant to address.
Markets Are Already Reopening
The FY27 plan builds on momentum already visible this year. Pakistan returned to the Eurobond market in April 2026 with a $500 million three-year issue under its Global Medium-Term Note programme, followed by a larger $750 million Eurobond the following month, its first sustained re-engagement with international bond investors in roughly five years. Both deals came after credit rating upgrades from Moody’s (to Caa1) and Fitch (to B-, from CCC+), with both agencies assigning stable outlooks. Pakistan’s dollar-denominated sovereign bonds were among the best performers in Asia through the back half of 2025, rallying as investor sentiment improved.
The government is also working toward its first-ever Panda Bond, a roughly $250 million yuan-denominated issue in China’s interbank market, with guarantees of up to 95 percent from the Asian Development Bank and the Asian Infrastructure Investment Bank designed to sweeten the deal for Chinese investors. The issuance has faced repeated delays pending regulatory approval from China’s National Association of Financial Market Institutional Investors, but officials say it remains on track.
Reserves Cushion and IMF Backing
Pakistan’s position going into FY27 looks steadier than it has in years. Total liquid foreign exchange reserves climbed to roughly $22.6 billion by mid-May 2026, with State Bank of Pakistan-held reserves around $17 billion, boosted by IMF disbursements and Panda and Eurobond proceeds. The central bank has guided reserves toward the $18 billion mark by the close of FY26. Continued support from the IMF’s $7 billion-plus Extended Fund Facility, including a Staff-Level Agreement reached earlier this year, remains a key anchor for the broader market-access strategy, giving prospective bond investors a degree of comfort that Islamabad’s reform path stays on track.
Experts Split on the Trade-Off
The reaction of economists to the move has been ambivalent. Muhammad Waqas Ghani, head of research at JS Global Capital, described the adoption of market borrowing as an indication of better debt management techniques, as opposed to efforts to raise the debt burden, and that this approach would result in greater diversity of financing and investor confidence. On the other hand, Khaqan Najeeb, a former finance adviser, expressed a more reserved view by noting that commercial debt comes with higher cost of servicing and is usually for shorter terms as compared to concessional bilateral loans. Thus, he noted that the success of this approach would be determined by the government’s ability to manage costs, maturities and growth.
For now, Islamabad is betting that improving credit ratings, a recovering reserves position, and steady IMF backing give it enough credibility to make that bet pay off.
