Pakistan faces a less forgiving global financial environment just as its sovereign risk has declined and foreign-exchange reserves have recovered. The yield on the 10-year US Treasury rose above five per cent in late September, touching 5.29pc on September 29, its highest level since 2007.
The obvious consequence is that Pakistan will pay more for dollar borrowing. But the effects go further. Persistently high US rates raise the returns demanded on foreign investment, reduce valuations of assets the government wants to privatise, increase the cost of maintaining borrowed reserves and complicate monetary policy at home.
Pakistan’s reserves had recovered to $21.4 billion by September 18, an important achievement after the near-crisis of 2023. But reserves represent only one side of a country’s balance sheet. To the extent that they are accumulated through new external liabilities, the headline number can overstate the improvement in the underlying external position.
If Pakistan borrows internationally at high rates and some of the proceeds sit in reserves invested in safer, lower-yielding assets, it has purchased valuable insurance against a foreign-exchange crisis — but at a cost. Reserves accumulated through exports do not create the same liability. Over time, what matters is not simply the level of reserves but the economy’s ability to replenish them through its own foreign-exchange earnings.
High rates raise the returns demanded on foreign investment, reduce valuations of assets the government wants to privatise, increase the cost of maintaining borrowed reserves and complicate monetary policy
High US rates also alter the economics of foreign investment. Pakistan is placing considerable hopes on attracting capital into mining, energy and infrastructure. International investors, however, do not evaluate Pakistani projects in isolation. When US government bonds yielded close to zero, a project offering an expected dollar return of 10pc could appear attractive despite substantial risk. If investors can obtain more than 5pc from US government debt, Pakistani projects must offer appreciably more to compensate for currency, regulatory, political and execution risks.
That raises Pakistan’s cost of equity as well as its cost of debt. It also affects privatisation. An asset’s value reflects the present value of its expected future cash flows. Higher discount rates reduce that value. Islamabad may therefore find itself trying to sell assets when expensive global capital is reducing what international investors are prepared to pay.
High US rates also complicate monetary policy. The State Bank’s policy rate remains well above US rates, and its primary mandate is domestic price stability. But global rates influence the attractiveness of dollar and rupee assets, external financing conditions and exchange-rate pressures. Pakistan’s capital account is not fully open, so the relationship is not mechanical. Nevertheless, persistently high US yields could narrow the room for domestic easing if inflation or pressure on the rupee were to re-emerge.
The more important question concerns the use of foreign capital. A country borrowing dollars at high rates cannot sustainably use those funds for consumption, recurrent expenditure or investments generating inadequate returns. Projects financed by external debt eventually need to produce sufficient economic value — and foreign-exchange earnings or savings — to service that debt.
This exposes a longstanding weakness in Pakistan’s development model. The country has often borrowed abroad to finance investments that generate economic activity domestically but limited foreign currency. Roads, power plants and urban infrastructure may raise welfare and productivity, but dollar debt incurred to finance them must ultimately be serviced through exports, remittances, foreign investment or further borrowing.
A project can therefore generate an acceptable domestic return while weakening the external balance sheet if the foreign exchange it earns or saves is insufficient to service the external debt incurred to finance it. The problem was easier to obscure when global money was cheap. It becomes harder when the risk-free dollar rate exceeds 5 per cent.
Pakistan’s successful $3bn international bond issue in September demonstrates how far market confidence has recovered. It raised $1.75bn through 5.5-year bonds at 7.5 per cent and $1.25bn through 10-year bonds at 7.9 per cent. Renewed market access is valuable, but it also creates a familiar temptation: to interpret the ability to borrow again as evidence that the external problem has been solved.
Pakistan has experienced versions of this cycle before. Reserves recover, sovereign spreads decline, and imports rise as economic activity strengthens. Exports fail to accelerate sufficiently and eventually the foreign-exchange constraint returns. Policymakers then seek another International Monetary Fund programme, bilateral rollover or infusion of foreign capital. Higher global rates make repeating that cycle more expensive.
Pakistan’s recovery should therefore be judged by more than reserves, the exchange rate or access to international debt markets. The more meaningful test is whether the country’s capacity to generate foreign exchange is improving faster than its external obligations.
Borrowing abroad for an investment that expands export capacity or efficiently substitutes for imports is fundamentally different from borrowing dollars for an asset whose revenues will be almost entirely in rupees.
Every new foreign loan should face a basic question: where will the dollars to repay it come from?
Pakistan cannot control the global price of money. It can reduce its vulnerability to it. The ultimate test of its recovery is not how readily it can borrow dollars when international markets reopen, but whether it can earn enough dollars not to depend on them.
The writer is the former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’.
Published in Dawn, The Business and Finance Weekly, October 5th, 2026
