By Qudsia Bano

Elevated global sovereign-bond yields are making international borrowing more expensive for emerging economies, increasing the importance of pricing and timing as Pakistan prepares to rebuild its presence in global debt markets.

Pakistan, however, enters the challenging global financing environment with a stronger foreign-exchange buffer than in recent years and no immediate large international bond maturity, providing the government greater flexibility in choosing when to approach international investors.

The government has budgeted Rs5.836 trillion for foreign loan repayments and another Rs1.071 trillion for servicing foreign debt in FY2026-27, while State Bank of Pakistan foreign-exchange reserves recently stood at $17.10 billion.

Global financing conditions became less supportive during June. On June 17, the US Federal Reserve kept its policy rate at 3.50-3.75%, citing inflation that remained elevated relative to its 2% objective amid energy-price pressures and Middle East uncertainty.

By June 30, BlackRock had reduced its stance on emerging-market hard-currency debt to neutral from a small overweight, reflecting a more selective environment for riskier sovereign borrowers.

Pressure intensified in July, when the US 10-year Treasury yield rose about 27 basis points during the month to 4.74%, increasing the benchmark funding cost against which dollar-denominated emerging-market debt is priced.

Foreign purchases of bonds in five major Asian markets fell to a four-month low of $2.03 billion in July. However, global emerging-market debt still attracted $26.7 billion, indicating that investor appetite remained intact but increasingly selective based on country risk and returns.

The global bond selloff deepened in August, with the US 30-year Treasury yield touching 5.3371%, while a 10-year Treasury auction cleared at 4.683%. Higher inflation expectations, growing sovereign debt issuance and concerns over fiscal deficits have increased long-term borrowing costs.

For Pakistan, the global environment is particularly relevant as the government considers rebuilding its presence in international capital markets through Eurobonds, Sukuk and other financing instruments.

The Ministry of Finance has said it is considering Eurobond and Sukuk options while assessing pricing, tenor and market conditions, alongside efforts to diversify financing through Panda bonds and local-currency instruments.

The Pakistan Economic Survey 2025-26 shows external public debt at $92.2 billion at end-March 2026. During July-March FY2026, external debt disbursements amounted to $6.10 billion, while principal repayments reached $6.25 billion and interest payments stood at $2.58 billion. No international bond was issued during those nine months.

Speaking to Wealth Pakistan, Ali Barkat, Group Taxation Manager at Gifto Industries, said rising developed-market yields effectively increased the minimum return international investors demanded from emerging-market sovereign borrowers.

Pakistan would have to pay the underlying US Treasury rate plus a country-risk premium, he said, meaning that persistently elevated global yields could materially increase the cost of fresh dollar borrowing.

Barkat said Pakistan should therefore avoid entering international markets merely to demonstrate market access and instead choose its issuance window carefully.

Stronger foreign-exchange reserves, fiscal consolidation and continued engagement with multilateral and bilateral lenders could help compress Pakistan's country-risk premium before larger international issuances were undertaken, he added.

Waqas Ghani, Head of Research at JS Global, told Wealth Pakistan that expensive external borrowing could also have implications for the domestic debt market.

If international financing became unattractive, greater government reliance on domestic borrowing could keep local yields elevated and reduce the space for cheaper private-sector credit, he said.

Ghani said Pakistan should continue lengthening its debt maturity profile, diversifying currencies and funding sources, and reducing dependence on short-term refinancing.

Improving exports and maintaining adequate foreign-exchange buffers would be particularly important because stronger external fundamentals would give Pakistan greater flexibility to wait for more favourable global financing conditions, he added.

That flexibility is supported by Pakistan's international bond maturity profile. The government's latest Annual Debt Review lists the next major outstanding bond repayment at $1.5 billion in December 2027.

Ghani said maintaining stronger external buffers and diversified financing sources could therefore allow Pakistan to approach international markets more strategically, rather than being forced to issue debt under highly unfavourable global leaning conditions.

Credit: INP-WealthPk