Pakistan Overhauling Debt Management to Meet Global Standards

Finance Minister Muhammad Aurangzeb announced on Friday that Pakistan is actively “restructuring and reorganising” its debt management strategy to align with international norms.

Addressing the Pakistan Stock Exchange (PSX) via video link during the launch of Pakistan’s inaugural Sovereign Domestic Green Sukuk, valued at Rs30 billion, Aurangzeb indicated that “innovative funding products for both domestic and international investors” would be unveiled in the near future.

The introduction of the Green Sukuk, an Islamic financial instrument designed to fund environmentally conscious projects, forms a key element of Pakistan’s strategy to restructure its domestic debt.

Reports indicate that the finance ministry and the central bank have initiated actions to ensure the sustainability of domestic debt restructuring.

These actions encompass converting short-term debts into instruments with extended maturities and diminishing substantial interest payments on the overall debt to free up fiscal resources for developmental projects.

Aurangzeb stated, “We (Pakistan) aim to emulate the Malaysian model for debt management/restructuring…we can gain valuable insights from their approach and progress accordingly,” although he did not provide specific details regarding the Malaysian model.

The recent repurchase of Treasury Bills (T-bills) and their substitution with cost-effective, long-term debt instruments, such as Pakistan Investment Bonds (PIBs), reflects the ongoing restructuring of domestic debt.

Back in 2024, the Governor of the State Bank of Pakistan (SBP), Jameel Ahmad, mentioned that the government’s reliance on short-term T-bills had decreased to 21% of the total debt portfolio, a reduction from 24%, with expectations to fall below 20% by the close of FY25.

Climate Financing

Transitioning to the topic of climate financing, Aurangzeb emphasized that climate change represents “an existential threat to Pakistan”.

He noted that while the necessary funding is accessible, Pakistan must “adopt tangible reform measures related to climate action.”

“One should never take financing for granted. The onus is now on us to develop viable and attractive projects for investment.”

The nation, which faced devastating floods in 2022, has amplified its endeavors to secure climate financing to alleviate the risks posed by climate change.

The IMF Executive Board recently sanctioned $1.3 billion in climate financing for Pakistan through the Resilience and Sustainability Facility (RSF).

In November of the preceding year, the nation obtained $500 million in climate financing from the Asian Development Bank (ADB). Earlier this year, Islamabad formalized a 10-year Country Partnership Framework with the World Bank to tackle climate-related challenges.

Dr. Shamshad Akhtar, Chairperson of the PSX, communicated that Pakistan intends to issue both Green Sukuks and Green Conventional Bonds.

She remarked, “Pakistan requires $348 billion for climate adaptation by 2030, a figure that surpasses the capabilities of conventional financing methods alone.”

Green Sukuks are regarded as a pathway to the $4 trillion Islamic finance sector and the $2.5 trillion green bond market, as she emphasized.

Given that the country’s energy composition is largely dependent on fossil fuels, accounting for approximately 60%, experts suggest that Green Sukuks could facilitate Pakistan’s transition towards renewable energy sources.

Improvements in Economic Indicators

Khurram Schehzad, Advisor to the Finance Minister, addressed attendees and underscored encouraging signs of economic progress.

He indicated that Pakistan’s debt-to-GDP ratio has improved from 74% to 65%, while the tax-to-GDP ratio has risen to 10.6% and is projected to reach 11% by the conclusion of FY26.

Schehzad also mentioned that Pakistan intends to introduce Panda Bonds by the final quarter of 2025 to gain entry into the Chinese capital markets.