Pakistan rejects USD 490 million loan over 8% interest rate
The government has asked officials to explore alternative financing after the proposed one-year facility exceeded its 6% cost target, as Pakistan faces substantial debt repayments and funding requirements in FY27.
Pakistan has rejected a USD 490 million financing offer from the International Islamic Trade Finance Corporation (ITFC) because its estimated borrowing cost of around 8% exceeded the government’s target of approximately 6%, according to media reports citing official sources.
The proposed facility was intended to provide financing for one year. However, the Finance Ministry’s Debt Management Office declined the offer last week, citing the cost of borrowing and the availability of potentially more competitive financing options.
Following the decision, the Finance Ministry asked the Economic Affairs Division to explore alternative funding through the ITFC or other lenders willing to offer financing on more favourable terms.
The move highlights the government’s efforts to manage the cost of external borrowing as Pakistan balances its financing requirements against the need to contain debt-servicing expenses.
Pakistan seeks cheaper financing alternatives
The estimated 8% financing cost was above the government’s target of around 6%, creating a gap of approximately 2 percentage points between the proposed terms and the borrowing-cost benchmark.
The difference is significant because financing costs affect the amount a borrower ultimately pays to access funds. However, the overall expense also depends on the facility’s tenure, fees, repayment schedule and other contractual conditions.
The debt office reportedly compared the proposed financing cost with the yield of around 6.1% on Pakistan’s bond maturing in December 2027. The comparison formed part of the assessment of whether the ITFC facility offered value relative to other available financing options.
The government’s decision does not necessarily mean it has ruled out borrowing from the ITFC altogether. Officials have instead been asked to examine whether the corporation or another lender can provide funds at a lower cost.
The ITFC is part of the Islamic Development Bank Group and provides trade-related financing to member countries and their businesses. Such facilities can help finance imports and support trade requirements, although the precise purpose and terms of the rejected USD 490 million proposal were not detailed in the available report.
Pakistan faces substantial financing requirements in FY27
The decision comes as Pakistan prepares to meet sizeable domestic and external financing requirements during fiscal year 2026-27.
According to the government’s annual borrowing plan, Pakistan’s gross financing needs are projected at PKR 28.647 trillion, equivalent to around 20% of gross domestic product (GDP).
These requirements include an estimated federal fiscal deficit of approximately PKR 7 trillion, alongside more than PKR 21 trillion in domestic and external debt maturities.
Gross financing needs represent the total amount a government must arrange to cover its budget deficit and refinance maturing obligations. They do not mean the entire amount must be raised through new external loans, as financing can also come from domestic borrowing, multilateral institutions and other sources.
The borrowing plan projects net external financing of PKR 813 billion, or approximately USD 2.8 billion, after accounting for repayments.
This distinction is important because new borrowing may be needed not only to finance spending but also to repay loans falling due during the year. When existing obligations mature, governments often seek to refinance part of the amount rather than repay everything from current revenues.
For Pakistan, securing financing on competitive terms is therefore an important part of managing its debt profile and meeting repayment commitments without placing additional pressure on public finances.
International borrowing costs remain a consideration
Pakistan has also returned to international capital markets to raise funds through bond issuances.
In September 2026, the government raised USD 3 billion through Eurobond issuances, according to reports. The financing included USD 1.75 billion through a five-and-a-half-year bond carrying a coupon rate of 7.5% and USD 1.25 billion through a 10-year bond with a coupon rate of 7.9%.
The coupon rate represents the annual interest paid to bondholders as a percentage of the bond’s face value. The effective borrowing cost can differ depending on the price at which a bond is issued and other associated expenses.
The reported yields on Pakistan’s international borrowing provide context for the government’s assessment of the ITFC proposal. However, the financing instruments are not directly interchangeable, as their maturities, structures, repayment terms and associated risks can differ.
Pakistan’s borrowing costs are also influenced by international interest rates, investor perceptions of sovereign risk and conditions in global financial markets.
Against this backdrop, the government’s effort to find lower-cost financing reflects the importance of comparing available funding sources rather than accepting a facility solely because it is available.
Debt servicing remains a key fiscal challenge
Debt servicing, which includes interest payments and the repayment of principal, is a major consideration for governments with substantial financing requirements.
Higher interest costs can increase future budgetary pressures by requiring a larger share of public revenues to be allocated to debt obligations. This can leave less fiscal space for development spending and other government priorities.
The impact of any individual loan depends on its size, tenure, repayment schedule and financing structure. For the rejected ITFC proposal, the difference between the estimated 8% cost and the government’s 6% target indicates why officials were seeking alternative terms.
The government’s next steps will depend on whether the ITFC or other lenders can offer financing that meets its cost expectations while providing the required funds within an appropriate timeframe.
No alternative lender, revised financing rate or replacement facility was identified in the information available. The final cost and terms of any subsequent arrangement will determine whether Pakistan can secure the financing at a lower cost.
