US Treasury rates have since risen above 5%, amid global geopolitical and economic uncertainties, according to the report.

ISLAMABAD: 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 high interest rates, as the country faces substantial gross financing needs.

According to government sources, the decision was taken last week after the finance ministry’s Debt Management Office (DMO) assessed the cost of the one-year facility as too high.

The finance ministry has asked the Economic Affairs Division to explore alternative financing options from the ITFC or other sources offering more competitive rates, the sources said.

The finance ministry spokesperson did not respond to a request for comment.

Pakistan Seeks Cheaper External Financing

The decision came a few months after Pakistan secured a $300 million commercial loan through United Bank Limited (UBL), which sourced the funds from Bahrain and Dubai in August. The government waived income tax on the profits the bank would earn from extending the facility, according to the sources.

A finance ministry official said foreign commercial loans had been offered on the condition that lenders would not bear taxes applicable in Pakistan. Such taxes would either be paid by the government or waived through an exemption.

The official added that the federal cabinet was legally empowered to grant the exemptions, although the resulting tax cost would ultimately affect the government budget.

The finance ministry has also processed an income tax exemption for the $300 million foreign-origin commercial loan, the sources said.

Financing Needs Estimated at 20% of GDP

Pakistan’s gross financing needs (GFN), including external requirements, remain substantial as the International Monetary Fund (IMF) projects a larger current account deficit than the estimate presented by Pakistani authorities during recent talks.

The IMF’s latest report projected the current account deficit at 1% of gross domestic product (GDP), or approximately $4.5 billion. This is at least $1.5 billion above the $2.5 billion to $3 billion estimate presented by Pakistani officials during the recently concluded discussions.

The same report placed Pakistan’s gross financing needs at around 22% of GDP for the previous fiscal year, a figure finance ministry officials considered high.

However, the ministry’s annual borrowing plan for fiscal year 2026-27 estimates total gross financing needs at Rs28.647 trillion, equivalent to approximately 20% of GDP.

The amount includes a federal fiscal deficit of Rs7 trillion and more than Rs21 trillion in domestic and external debt maturities, according to the ministry’s report based on the original budget estimates.

Net external financing is projected at Rs813 billion, or around $2.8 billion, after repayments of maturing debt. This means the government’s gross external borrowing requirements would be higher than the net figure.

The ministry is relying on multilateral lenders as a major source of external financing, with net lending of $1.6 billion expected to help meet its requirements.

ITFC Loan Cost Exceeded Debt Office’s Target

Sources said the Debt Management Office considered the ITFC facility expensive because it had hoped to secure financing at an interest cost of around 6%.

The ITFC’s proposed all-in cost of approximately 8% was higher than the 6.1% yield at which Pakistan’s bond maturing in December 2027 was trading, according to the sources.

The DMO has been operating without a permanent director general since January this year.

Pakistan’s Eurobond Borrowing Costs

In September, Pakistan raised $3 billion through Eurobonds at interest rates higher than those paid on its five-year and 10-year Eurobonds issued in 2021.

The finance ministry attributed the relatively lower borrowing costs in 2021 to low US Treasury yields, which ranged from 1% on five-year bonds to 1.64% on 10-year bonds.

US Treasury rates have since risen above 5%, amid global geopolitical and economic uncertainties, according to the report.

The finance ministry said Pakistan raised $1.75 billion through a five-and-a-half-year Eurobond carrying a coupon rate of 7.5%.

The face-value interest rate on the five-year Eurobond issued during the Pakistan Muslim League-Nawaz (PML-N) government was 3 percentage points above the comparable US Treasury rate. During the Pakistan Tehreek-e-Insaf (PTI) government, the difference was 5 percentage points, according to the report.

The actual interest rate on the PML-N-era five-year transaction was 7.75%.

The government also raised $1.25 billion through a 10-year Eurobond with a face-value interest rate of 7.9%.

Pakistan’s decision to reject the ITFC offer reflects its effort to secure external financing at more competitive rates while managing substantial fiscal and debt repayment requirements.