When the PML-N government returns to the international capital market in a few days, the most important factor would be its quest for $1 billion foreign exchange to support its dwindling international reserves at a critical strategic threshold — three months of import cover.

This is important because a country is ineligible to qualify for loans from the International Bank for Reconstruction and Development (IBRD) — a concessional arm of the World Bank Group — if its international currency reserves fall below three months of its import bill. This is quantitative criteria with no international politics involved.

Pakistan comfortably met this threshold on the basis of foreign exchange reserves at June 30, the close of the fiscal year. But then it faced a $2bn current account deficit in July that would obviously have a more or less equivalent negative impact on reserves.

But equally important will be to contract this loan at a lower price that does not destabilise repayment costs beyond the ongoing basket range.

Lobbying from salesmen for a Eurobond is currently at its peak and renowned banks will be making impressive presentations. They make a case that previous international financing was raised from the Middle East and hence the turn this time should be for the European and American markets.

Investors from the Middle East are also aiming to have the ijara sukuk rolling out. To their advantage is a portion of a motorway available for collateral that cuts the bond pricing by at least two per cent when compared with the Eurobond. Practically, the motorway asset remains under the control of the government of Pakistan, notwithstanding its pledge on the paper.

But when all is said and done, the decision will boil down to the interest rate available when Finance Minister Ishaq Dar and Prime Minister Shahid Khaqan Abbasi make the final pick.

This also has a context. Pakistan’s domestic borrowing cost was around 12pc and 10-year Treasury bill price around 9.5-10pc in 2014. The interest rate has come down to 8-10pc and the T-Bill rate to about 6pc. With an average 3.5pc to 4pc fall, the refinancing of domestic maturities is done at a cheaper rate.

On the external front, about 12.5pc of the portfolio relates to Eurobond, sukuk and commercial loans. The remaining 87.5pc loan portfolio is built up of relatively cheaper multilateral loans.

This has helped bring down the weighted average domestic interest from 8-9pc by 2.25pc in three years which, coupled with replacement from foreign loans, has cumulatively reduced overall debt repayment cost by about 6.25pc, according to the Ministry of Finance.

As the government goes back to the negotiating table, what are the factors that will influence who it ultimately turns to for monetary aid?

In overall terms, external debt stood at around $48.1bn four years ago and the current government has added about $14bn from a reserve base of about $6bn in June 2006 which hovered at $16bn by end-June 2016, showing an increase of $10bn.

Total external public debt has since increased to $58.4bn at end-March 2017 including $11.9bn from the Paris Club, $25.9bn from multilateral institutions, $5.2bn worth of other bilateral loans, $5.6bn of Islamic and Eurobonds, $2.2bn of commercial credits and $6bn of the IMF, besides some smaller deposits.

The latest non-Paris Club loans contracted are from China, Kuwait and Saudi Arabia all having an interest rate of six-month Libor plus 2.8pc with a 12-year maturity. Among the multilaterals, the ADB has provided around $1.3bn worth of 19-24 year loans carrying 2pc fixed and six-month Libor plus 0.6pc.

Asian Infrastructure Investment Bank has provided a $300 million loan for 19 years at six-month Libor plus 0.75pc while the World Bank has extended an IDA loan at $745m for 24 years at 1.88pc to 3.2pc fixed interest rates. It has also provided another $690m IBRD loan at six-month Libor plus 0.5pc-0.75pc for 19-21 years.

On the other hand, the China Development Bank is lending medium-term loans for three years at Libor plus 3.02pc, ICBC China at three-month Libor plus 2.75pc and Noor Bank at three-month Libor plus 2.5pc.

The sukuk bond issued last year for $1bn is carrying an interest rate of 5.5pc for five years against 8.25pc of $1bn Eurobond at 8.25pc interest rate for 10 years.

And during this four-year period, a cumulative current account deficit of $20bn was financed out of national reserves including $11bn last year alone. This is the main cause of concern because reserves may have been $36bn instead of $16bn had there been no such current account deficit.

This partly explains why Finance Minister Ishaq Dar has been averse to currency devaluation in the absence of commensurate increase in global export demand and domestic exportable surplus.

Foreign debt has increased significantly over the past few years but that was perhaps unavoidable with the induction of CPEC pumping imports into the energy sector and helping the economy expand at above 5pc. Still, while external debt growth has a positive cash flow, a continuous export decline remains one of the most serious concerns.

Published in Dawn, The Business and Finance Weekly, August 28th, 2017