Pakistan returns to global capital market as it seeks more funding sources

Pakistan is preparing a structured return to international capital markets in 2026 as part of a broader strategy to strengthen external liquidity and diversify funding sources beyond traditional multilateral and bilateral lenders, according to a report by Arif Habib Ltd.

The government is considering multiple financing options, including the potential issuance of Panda Bonds worth about $200 million to $250 million, the brokerage said.

Such an issuance could be supported by credit enhancement through guarantees from multilateral institutions to attract Chinese investors.

Pakistan may also explore tapping global fixed-income markets through U.S. dollar-denominated Eurobonds under its existing Global Medium-Term Note program, or assess the feasibility of issuing Islamic Sukuk, depending on market conditions and investor appetite, the report said.

A key driver behind the planned issuance strategy is the $1.3 billion principal repayment due in April 2026 on an existing five-year international bond.

The government may seek to refinance most or all of this maturity through a new Eurobond, with the final size to be determined closer to the repayment date based on prevailing market conditions, Arif Habib Ltd. said.

Investor sentiment toward Pakistan has improved markedly, supported by a sharp narrowing in credit risk indicators.

Pakistan’s five-year Credit Default Swap spread has tightened to around 400 basis points, levels last seen in 2021, reflecting reduced perceived default risk and growing confidence in the country’s macroeconomic stabilization under the ongoing International Monetary Fund program.

While global interest-rate volatility and geopolitical risks remain, Arif Habib Ltd. said lower CDS spreads and positive engagement with rating agencies and international investors suggest Pakistan could secure more favorable pricing than in previous market forays.

Taken together, potential Panda bond, Eurobond and Sukuk issuances represent a pragmatic, multi-currency approach to meeting external financing needs in 2026, the brokerage said.

Pakistan’s improving access to capital markets has been underpinned by a series of credit-rating upgrades, signaling progress in its macroeconomic turnaround.

In April 2025, Fitch Ratings upgraded Pakistan’s long-term foreign-currency rating to B- from CCC+, citing fiscal consolidation, improved external stability and strong commitment to structural reforms under the IMF program.

In July, S&P Global Ratings followed with a similar upgrade to B- with a stable outlook, highlighting rising foreign-exchange reserves and government efforts to strengthen revenue collection.

Most recently, Moody’s Investors Service upgraded Pakistan’s long-term debt rating to Caa1, pointing to stronger external liquidity and a more credible fiscal outlook.

Moody’s noted that Pakistan has honored its external debt obligations, increased foreign-exchange reserves to slightly above $14 billion, and successfully completed a key IMF review.

Looking ahead, Arif Habib Ltd. said expectations of improving macroeconomic conditions — including lower inflation, stronger State Bank of Pakistan reserves, currency stability and contained fiscal deficits — could pave the way for further credit rating upgrades, facilitating Pakistan’s sustained return to international capital markets.

An independent market analyst said the government’s strategy reflects a cautious but constructive re-engagement with global investors.

“The narrowing CDS spreads and recent rating upgrades indicate that markets are beginning to price in lower sovereign risk,” the analyst said. “Refinancing the April 2026 maturity through a well-timed Eurobond or a diversified mix of instruments could ease external pressures and extend Pakistan’s debt maturity profile.”

The analyst added that success would ultimately depend on maintaining IMF-backed reforms and navigating global market volatility.

“Consistency in policy execution will be critical if Pakistan wants to convert improved sentiment into durable market access,” the analyst said.