Pakistan has turned down a $490 million commercial financing facility offered by the International Islamic Trade Finance Corporation (ITFC), an arm of the Islamic Development Bank Group, because the proposed borrowing cost was higher than the Finance Ministry’s target, according to government officials.
The decision was taken last week by the Finance Ministry’s Debt Management Office (DMO), which had been seeking an interest cost of around 6%. Sources said the ITFC’s proposed all-in financing cost was approximately 8%, prompting the government to reject the one-year facility.
The Finance Ministry has asked the Economic Affairs Division to explore alternative financing from the ITFC or other lenders offering more competitive terms.
The ministry’s spokesperson did not respond to a request for comment on the decision.
Pakistan Seeks Cheaper External Financing
The rejection came a few months after Pakistan obtained a $300 million commercial loan from United Bank Limited (UBL). According to sources, the bank arranged the financing through Bahrain and Dubai in August 2026.
The government waived income tax on the profits the bank would earn from the loan, according to the report. Officials said foreign commercial lending facilities had been offered on the condition that applicable Pakistani taxes would not be borne by the lenders.
Under the arrangements described by the officials, the government must either cover the tax liability or grant an exemption. They added that the law empowers the federal cabinet to waive such taxes, although any tax paid by the government would ultimately add to the burden on the public budget.
The Finance Ministry is now looking for alternative borrowing options as it attempts to meet its financing requirements without accepting what it considers excessively expensive loans.
Government’s Gross Financing Needs Reach 20% of GDP
Pakistan faces substantial borrowing requirements in the current fiscal year, including the need to finance its budget deficit and repay maturing domestic and external debt.
According to the Finance Ministry’s annual borrowing plan for fiscal year 2026-27, the country’s total gross financing needs are projected at Rs28.647 trillion, equivalent to approximately 20% of gross domestic product (GDP).
The estimate includes a federal fiscal deficit of around Rs7 trillion. More than Rs21 trillion in additional requirements relate to domestic and external debt maturities, according to the report.
Gross financing needs represent the total funding required to cover a government’s deficit and repay maturing obligations. They are therefore substantially higher than the amount of new borrowing needed to finance the deficit alone.
The ministry’s borrowing plan projects net external financing of Rs813 billion, equivalent to approximately $2.8 billion. This figure represents the net amount remaining after repayments of maturing debt, meaning gross external borrowing requirements would be higher.
The government expects multilateral lenders to remain a major source of external financing, with the borrowing plan relying on their support to meet its funding needs.
IMF Projects Higher Current Account Deficit
Pakistan’s external financing outlook has also come under pressure following the International Monetary Fund’s latest projections.
The IMF reportedly projected Pakistan’s current account deficit at around 1% of GDP, equivalent to approximately $4.5 billion. This is at least $1.5 billion higher than the $2.5 billion to $3 billion estimate presented by Pakistani authorities during recently concluded discussions.
The IMF also estimated Pakistan’s gross financing needs at around 22% of GDP for the previous fiscal year, a figure that Finance Ministry officials reportedly considered relatively high.
A larger current account deficit can increase the country’s need for foreign currency, while substantial debt repayments create additional pressure on its external financing position.
These challenges have made the cost and availability of commercial borrowing particularly important for policymakers.
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Why the Government Rejected the 8% Loan
The Debt Management Office reportedly considered the ITFC’s proposed all-in financing cost of approximately 8% too expensive, particularly when compared with the yield on Pakistan’s existing debt.
Sources said a Pakistani bond maturing in December 2027 was trading at around 6.1%, below the cost proposed for the ITFC facility.
However, the cost of different borrowing instruments can vary according to maturity, repayment terms, currency, fees and other conditions. A direct comparison of their interest rates does not necessarily capture every difference in financing risk.
The government’s decision nevertheless reflects its preference for borrowing at more competitive rates to limit future debt-servicing costs.
Eurobond Borrowing Remains Expensive
Pakistan’s recent international bond transactions illustrate the higher cost of raising money in global markets.
In September 2026, the government raised $3 billion through Eurobonds at interest rates higher than those paid on comparable five- and 10-year bonds issued in 2021.
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 actual interest rate on the five-year transaction was reported at 7.75%.
The government also raised $1.25 billion through a 10-year Eurobond carrying a face-value interest rate of 7.9%.
The difference in borrowing costs reflects changes in international financial conditions. In 2021, US Treasury yields were significantly lower, ranging from around 1% on five-year bonds to 1.64% on 10-year bonds, according to the report.
By contrast, the report cited prevailing US Treasury rates above 5%, alongside geopolitical and economic uncertainty, as contributing to higher global borrowing costs.
The interest rates Pakistan must offer investors are influenced by international benchmark yields as well as the country’s own credit risk and market conditions.
Debt Management Office Faces Leadership Gap
The Finance Ministry’s Debt Management Office has reportedly been operating without a permanent director general since January 2026.
The office plays an important role in assessing borrowing proposals, managing public debt and evaluating the cost and risks associated with financing options.
The rejection of the ITFC facility comes as the government attempts to balance its substantial financing requirements against the risk of taking on expensive debt.
Pakistan Searches for Alternative Funding
The Finance Ministry has directed the Economic Affairs Division to identify another financing facility from the ITFC or an alternative lender on more favourable terms.
The government must secure sufficient funding to cover its fiscal deficit, repay maturing obligations and meet external financing requirements. At the same time, it faces pressure to keep borrowing costs under control as international interest rates and economic uncertainty remain elevated.
The rejection of the $490 million offer highlights the challenge facing Pakistan’s debt managers: securing the funds the country needs without accepting financing terms that could further increase the cost of servicing public debt.
