Pakistan has rejected a proposed $490 million commercial loan from the International Islamic Trade Finance Corporation (ITFC), an arm of the Islamic Development Bank (IsDB) Group, over its high borrowing cost, according to government officials.
The decision was taken last week by the Finance Ministry’s Debt Management Office (DMO), which considered the facility’s estimated all-in cost of around 8% too expensive. Officials said the government had hoped to secure financing at an interest cost of approximately 6%.
The one-year facility was declined amid Pakistan’s substantial gross financing needs (GFN), which the Finance Ministry estimates at around 20% of the country’s gross domestic product (GDP).
The ministry has asked the Economic Affairs Division to explore alternative financing from the ITFC or other lenders offering more competitive rates, officials said. The Finance Ministry spokesperson did not respond to a request for comment.
ITFC Loan Deemed Too Expensive
According to the officials, the proposed loan’s all-in cost of around 8% was higher than the approximately 6.1% yield at which Pakistan’s bond maturing in December 2027 was trading.
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The Debt Management Office had expected a lower borrowing cost, particularly given the government’s financing requirements and the availability of other debt instruments.
The debt office has also been operating without a permanent director general since January, according to the report.
Pakistan’s decision to reject the facility comes a few months after it secured a $300 million commercial loan from United Bank Limited (UBL) in August. The financing reportedly originated from Bahrain and Dubai.
Sources said the government agreed to waive income tax on profits earned by the bank through the loan. Officials added that tax exemptions or government-paid taxes have been part of the conditions attached to some foreign-origin commercial lending facilities.
Pakistan’s Financing Needs Remain High
The International Monetary Fund (IMF) has projected a larger current account deficit for Pakistan than the estimates presented by Pakistani authorities during recently concluded discussions.
In its latest report, the IMF projected the current account deficit at 1% of GDP, equivalent to approximately $4.5 billion. This is at least $1.5 billion above the $2.5 billion to $3 billion range cited by Pakistani officials during the talks.
The same report placed Pakistan’s gross financing needs at around 22% of GDP for the previous fiscal year, a level that Finance Ministry officials reportedly considered high.
However, the ministry’s annual borrowing plan for fiscal year 2026-27 projects total gross financing needs of Rs28.647 trillion, equivalent to approximately 20% of GDP.
The estimate includes a federal fiscal deficit of around Rs7 trillion and more than Rs21 trillion in domestic and external debt maturities.
The borrowing plan projects net external financing of Rs813 billion, or approximately $2.8 billion, after accounting for repayments of maturing debt. As a result, gross borrowing requirements are higher than the net financing figure.
The ministry is relying on multilateral lenders as a key source of external funding, with approximately $1.6 billion in net lending expected from these institutions to help meet financing requirements.
Global Interest Rates Push Up Borrowing Costs
Pakistan’s borrowing costs have also been affected by elevated international interest rates and geopolitical uncertainty.
In September, the government raised $3 billion through Eurobond issuances at rates higher than those paid on comparable five- and 10-year bonds issued in 2021.
The Finance Ministry attributed the comparatively lower rates in 2021 partly to subdued US Treasury yields, which ranged from around 1% on five-year bonds to 1.64% on 10-year bonds at the time.
Current US Treasury rates have risen above 5% amid global geopolitical and economic uncertainty, increasing the cost of international borrowing for emerging markets.
According to the Finance Ministry, Pakistan raised $1.75 billion through a five-and-a-half-year Eurobond carrying a coupon rate of 7.5%. The government also issued a $1.25 billion 10-year Eurobond at a face-value interest rate of 7.9%.
The report noted that the face-value interest rate on the five-year bond was approximately three percentage points above the comparable US Treasury rate. During the Pakistan Tehreek-e-Insaf (PTI) government’s tenure, the corresponding premium had been around five percentage points.
The actual interest rate on the five-year transaction under the Pakistan Muslim League-Nawaz (PML-N) government was reported at 7.75%.
Tax Exemptions Add to Cost of Commercial Borrowing
The government has also processed an income tax exemption linked to the $300 million foreign-origin commercial loan, according to sources.
A Finance Ministry official said commercial loan facilities from foreign sources had been offered on the condition that lenders would not bear taxes applicable in Pakistan. Under such arrangements, the government either assumes the tax liability or grants an exemption.
The official said federal law empowers the cabinet to waive these taxes, although any tax paid by the government ultimately becomes a budgetary expense.
Such arrangements can add to the fiscal cost of borrowing, even when the headline loan amount does not change.
Pakistan’s rejection of the ITFC facility reflects the government’s effort to balance immediate financing requirements against the cost of additional debt, as it seeks more competitive terms from multilateral institutions and other lenders.
