In a landmark move towards sustainable finance, the Government of Pakistan has officially announced the launch of the country’s first Green Sukuk, targeting a volume of 20 to 30 billion rupees. This initiative marks a significant milestone in the nation’s journey towards environmentally conscious financing while attempting to integrate Islamic finance principles into modern economic solutions.
Despite its positive optics, two critical observations emerge. Firstly, while Sukuk are structured to comply with Islamic finance norms, they remain a form of government borrowing. The rate of return on these instruments will be dictated by prevailing market conditions, making them subject to investor sentiment and economic risk. Secondly, the government’s projection of raising between 20 and 30 billion rupees indicates uncertainty about the level of public and institutional interest in this offering.
Investor confidence is likely to be influenced by the broader geopolitical climate, particularly the escalating tensions between India and Pakistan. These uncertainties have already been mirrored in the volatility of Pakistan’s sovereign bonds, with rating agencies remaining cautious about the country’s financial standing.
Currently, none of the three major international credit rating agencies have granted Pakistan an investment-grade rating. While Fitch Ratings recently upgraded Pakistan’s outlook from “substantial credit risk” to “highly speculative,” the new rating still implies that the country remains vulnerable to adverse changes in the business and economic environment. The other two major agencies, Moody’s and Standard & Poor’s, have yet to follow suit. Following recent military flare-ups with India, Moody’s issued a cautionary statement warning that further conflict could carry economic consequences too severe for Pakistan to absorb, given its already precarious fiscal health.
Adding to the pressure, Pakistan continues to operate under a strict International Monetary Fund (IMF) program. Any deviation from the agreed-upon terms could trigger the suspension of the program and jeopardize the $16 billion in financial support from friendly nations including China, Saudi Arabia, and the United Arab Emirates.
Debt servicing remains the single largest expense in Pakistan’s federal budget. This fiscal year, the government has allocated 9.775 trillion rupees for mark-up payments—more than half of the total budget of 18.877 trillion rupees. Last year, the government budgeted 7.302 trillion rupees for interest payments, but actual expenditures reached 8.26 trillion rupees, showing a typical trend of underestimating financial obligations. Given ongoing regional tensions and economic volatility, there is a strong likelihood that this year’s debt servicing costs will once again exceed budgeted projections.
Pakistan’s economic fundamentals remain under severe stress. Foreign exchange reserves are lower than the amount of rollovers extended by allied countries, and the State Bank of Pakistan faces allegations—yet unaddressed—of intervening in the open market to inflate remittance figures. Meanwhile, the large-scale manufacturing sector has shown consistent contraction over the past three years, indicating persistent structural weaknesses.
Compounding the economic vulnerabilities are looming environmental risks. India’s threats to reconsider the Indus Waters Treaty could drastically worsen Pakistan’s already critical water scarcity situation, pushing the country towards chronic droughts or sudden floods based on upstream actions by its neighbor.
While the branding of the new financial instrument as a “Green Sukuk” is a step towards climate-conscious development, it alone cannot counteract the severe environmental, financial, and geopolitical challenges Pakistan currently faces. Stakeholders must approach this development with both optimism and realism, understanding that meaningful progress will require comprehensive reforms and coordinated action across multiple sectors.
The government’s move to introduce Green Sukuk is commendable for its symbolic and practical potential. However, without robust fiscal management, credible geopolitical diplomacy, and serious investment in climate resilience, the benefits of this sustainable finance initiative may remain largely aspirational.