When you are carrying a backpack on your shoulders, it does not feel heavy at first. The true effort is felt on the downhill, while the burden only reveals itself as climbs grow steeper. Similarly, a country can carry foreign debt lightly until debt-servicing costs rise, growth slows, and external cushions wear thin.
In a previous article, we discussed how different types of foreign debts have different kinds of implications. In this article we will talk about how Pakistan is going to navigate this maze.
Pakistan’s external debt is not the end of the world, but as we outlined in our previous article on external liabilities, the current load is heavier than ideal. It’s time to unpack what’s inside that backpack, understand the terrain, and chart a sustainable path forward.
The Size and Shape of the Load
According to the latest SBP data, Pakistan’s external debt and liabilities stand at approximately $120 billion in June 2025. The debt is split into three main tranches:
- Multilateral: Loans from institutions like the IMF, World Bank, ADB—cheaper interest, longer maturities, more flexible terms. This includes concessionary facilities that the country has obtained in the last few years
- Bilateral: Country-to-country loans—like from China or Saudi Arabia. China being the biggest creditor has often helped Pakistan’s external account by rolling over its debts. Similarly other friendly nations like Saudi Arabia and UAE have fixed deposits and loans with Pakistan, helping Pakistan’s forex reserves.
- Commercial: Market-based borrowing, including Eurobonds and syndicated loans—typically costly and often short-dated.
Here’s a rough breakdown, in tabulated form, of the loans acquired by Pakistan from SBP and IMF.
| Category | June 2025 ($bn) | % of Total |
|---|---|---|
| Multilateral | 45 | 37.5% |
| Bilateral | 35 | 29.2% |
| Commercial | 40 | 33.3% |
| Total | 120 | 100% |
Understanding the Tranches
Multilateral Loans (≈$45bn)
These are relatively friendly terms—low interest, extended repayment. Examples: the IMF’s Extended Fund Facility (EFF) of ~$7bn, ADB green financing projects, and the World Bank’s budgetary support. These funds often guarantee conditions (e.g., tax reform, subsidy reduction), making them stronger instruments for long-term planning.
Bilateral Debt (≈$35bn)
These loans have been acquired by Pakistan from countries like China (CPEC infrastructure), Saudi Arabia, and UAE. Though interest is moderate, it’s crucial to stagger repayments and diversify so a downturn in any one lender doesn’t upend refinancing plans.
Commercial Borrowing (≈$40bn)
The heaviest, most urgent—Eurobonds, Sukuk, syndicated loans. Maturing mostly between 2025–2028, the debt servicing could squeeze budgets and starve development funding. In fact, over $15 billion of this debt is short-term and requires refinancing or repayment in the next 2–3 years—an enormous liability that can choke productive spending.
Short-term vs Long-term Obligations
Bond maturity schedules show that from 2025–2027, Pakistan must repay or refinance roughly $20bn at high interest—no small feat for an economy with ~$40–50bn in foreign exchange reserves. In contrast, multilateral loans span 10–30 years, giving breathing room. The concern is not just repayment, it is the cost. Refinancing high-interest bonds shrinks fiscal space, potentially crowding out development or subsidy programs.
Responsible Debt Management at Work
Here’s why the current government deserves recognition. Since coming into power in 2022, they have:
- Raised concessional funding—through new sustainability-linked loans and green bonds.
- Refinanced commercial financing where possible—negotiating longer maturities and lower rates.
- Prioritized bilateral and multilateral loans over costly commercial borrowings, tempering the commercial debt curve between 2023–25 compared to 2019–22.
By comparison, during 2018–22, Pakistan leaned excessively on market borrowing, inflating total external debt from about $85bn to $110bn, much of it commercial. Though GDP growth rates were impressive on paper, they masked looming high-interest burdens. Pakistan’s efforts to avoid default and rescue its failing economy were praised by IMF as well.
The Real-World Impacts
High short-term debt forces governments to divert resources toward interest payments rather than roads, schools, or hospitals. It also makes economies vulnerable to sudden stop (“hot money” exiting), currency swings, and bond market panics. The current government’s focus on stability—shrinking deficits, freezing commercial debt growth—is both prudent and politically advantageous, though future challenges remain.
Charting the Road Ahead
To keep the backpack manageable, Pakistan must:
- Accelerate concessional refinancing of commercial debt to extend maturities.
- Boost exports and remittances, increasing foreign reserves that buffer refinancing pressures.
- Improve debt transparency, with clear public reporting and SWF deposits.
- Target capital expenditure, not consumption, with any additional borrowing—spending on infrastructure and job creation that helps repay debt.
The Weight We Carry
Debt is not a paradox of failure—it’s a tool for development when used wisely. In Pakistan’s case, a heavy tilt toward short-term, costly debt created risks that could have derailed growth. Going forward, the government’s prudent shift toward long-dated, concessional, and green financing is a welcome pivot—positioning the country to unlock future prosperity without being crushed by today’s repayments.
But caution is essential. Debt labels can mask reality, high GDP growth amid high debt is not growth, it’s borrowing disguised as expansion. Pakistan’s next test will be to keep the stability narrative credible by controlling commercial exposure, growing real economic activity, and most of all, investing in productive assets that pay for themselves and help regain grip on the path ahead.
Our backpack is still heavy—but with renewed discipline, transparent planning, and steady execution, Pakistan can turn this debt into a lever for growth, not a chain that confines its future.
