Pakistan’s financial challenges have reached a critical juncture, as the government grapples with mounting debt and persistent fiscal deficits. Despite initial hopes for swift support from its key bilateral lenders to secure an IMF bailout, the process has faced delays, pushing the anticipated approval into September. With ambitious borrowing targets set for the current fiscal year, Pakistan’s reserves are projected to grow, yet the underlying fiscal mismanagement over the past decade poses a significant threat to the nation’s economic stability.

Pakistan has approached Saudi Arabia with a request to enhance its lending by approximately $1.5 billion, expanding upon the existing $5 billion portfolio, in an effort to close the external financing gap required for the IMF’s 37-month bailout package.

As a standard procedure, all three bilateral partners—Saudi Arabia, China, and the UAE—are obligated to confirm to the IMF, through their respective executive directors, the rollover of $12 billion in loans to Pakistan. Last month, the Pakistani government officially acknowledged that it had initiated discussions for the reprofiling of over $27 billion in debt and liabilities with these three allied nations. The IMF has stipulated that the reprofiling or rollover of $12 billion is a mandatory condition under the $7 billion Extended Fund Facility.

Islamabad has also sought Beijing’s assistance in reprofiling more than $15 billion in energy sector liabilities and converting coal-based energy projects reliant on imports to those utilizing local coal. This move aims to create fiscal space by easing the challenges of timely repayments and reducing the burden of foreign exchange outflows in the energy sector, as well as consumer tariffs.

Currently, Saudi Arabia holds a $5 billion exposure to Pakistan, followed by China with $4 billion and the UAE with $3 billion. Pakistan has requested an additional $1.5 billion from Riyadh, which is anticipated to be provided as a bilateral commercial loan, though it might also be delivered in the form of a SAFE deposit.

Upon his return from China on July 28, the finance minister stated that his counterparts from the three nations had pledged their support, positioning Pakistan in a more secure stance regarding the external financing gap. However, this support has yet to fully materialize. Authorities now acknowledge that while financing for the second and third years of the program is likely secure, securing the necessary funds for the first year is proving more time-consuming.

Despite a couple of offers from Western banks, the interest rates associated with these offers are uncomfortably high given Pakistan’s current political and macroeconomic conditions, as well as its less-than-ideal credit rating. Pakistan will need to ensure a favorable environment with an improved credit rating and firm support from Saudi Arabia before finalizing term sheets with foreign banks for commercial lending. These banks have reportedly expressed a willingness to provide $300-350 million each in credit for the current fiscal year, with plans to integrate this funding with sukuk bonds in the next fiscal year.

The finance ministry initially anticipated that the trio of bilateral lenders—Saudi Arabia, China, and the UAE—would promptly extend the rollover of $12 billion in annual debt for an additional three to five years, ensuring the approval of the IMF board for its $7 billion economic bailout before the end of August. However, this expectation has now shifted, with the ministry projecting that IMF board approval will likely occur in September.

For the current fiscal year, Pakistan has set an ambitious target of $20 billion in foreign borrowing, as outlined in the budget, alongside an additional $3 billion rollover from the UAE, earmarked separately to stabilize the balance of payments. With such a significant borrowing plan, Pakistan’s reserves were projected to swell to approximately $19 to $20 billion by the end of the fiscal year. Out of the $20 billion forecast, roughly $4 billion is expected to be secured through foreign commercial borrowing, with an additional $1 billion anticipated from the issuance of international bonds.

Pakistan’s fiscal management has long been marked by imprudence, as evidenced by the persistent and excessive fiscal deficits that successive governments have allowed to balloon over the past decade and a half. The nation’s headline fiscal deficit has averaged over 6.3% of GDP annually since 2010 and nearly 7.4% over the last five years, resulting in a massive accumulation of debt during this period. Although the government has committed to reducing the deficit to slightly below 6% in the current fiscal year, as per its agreement with the IMF, the budget still faces a staggering deficit of Rs8.5 trillion, up from last year’s Rs8.3 trillion, necessitating even more borrowing. The government must resort to extensive borrowing—whether through the rollover of existing debt or fresh loans—to meet its obligations on external debt maturing within the current year.

Thus, the government’s plan to borrow Rs32 trillion during the present fiscal year, both to fund the budget and to repay maturing foreign loans, comes as no surprise. However, it starkly highlights the fact that Pakistan’s annual gross financing needs have surged to 26% of GDP, underscoring the reality that the country’s debt burden has become unsustainable. The success of this plan is largely contingent on the IMF Executive Board’s approval of the recently concluded $7 billion deal and Beijing’s willingness to roll over $7.9 billion in debt. While the government remains optimistic about securing the IMF deal and the Chinese debt rollover, it faces significant challenges on both fronts.

The fiscal crisis Pakistan faces today did not arise overnight. It is the result of years of profligate spending to sustain the opulent lifestyles of the ruling elites, compounded by poor policy decisions, structural deficiencies, and chronic economic underperformance. While support from the IMF and China may provide temporary relief, long-term debt sustainability and economic recovery hinge on the country’s ability to drastically reduce its runaway deficit to below 3% by increasing tax revenues and curbing the wasteful expenditures that perpetuate the privileges of rent-seeking classes. Unfortunately, this is a challenge that Pakistan’s political and economic leaders have repeatedly failed to meet, year after year.

Pakistan stands at a crossroads, where the reliance on external borrowing and the continuation of unsustainable fiscal practices have brought the nation to the brink of a severe financial crisis. While temporary relief from the IMF and bilateral partners may stave off immediate disaster, the long-term solution lies in addressing the structural flaws that have driven the country’s deficits to unsustainable levels. Only by reducing the fiscal deficit, increasing revenue generation, and curbing unnecessary expenditures can Pakistan hope to achieve lasting economic stability and break free from the cycle of debt dependency. The challenge ahead is formidable, and it remains to be seen whether the country’s leadership is up to the task.