January 28, 2025 – Pakistan’s government is taking proactive steps to address its fiscal challenges by introducing a Sovereign Sustainable Finance Framework. The initiative, currently being developed by the Debt Management Office, is aimed at boosting international capital market issuances and directing funds toward projects that support climate adaptation, promote social equity, and drive green economic growth. This comprehensive strategy is expected to generate significant savings in the country’s debt servicing costs, with estimates suggesting a reduction of over Rs1 trillion in the current fiscal year.
As outlined in the Finance Division’s latest half-yearly report, “State of Pakistan’s Economy,” the government’s debt management approach includes a focus on diversifying financing instruments to appeal to a wider range of investors. This diversified strategy is not only expected to reduce the financial burden on the government but also help meet the nation’s long-term sustainable development goals. By tapping into green and socially responsible financing, the government aims to enhance both fiscal stability and environmental sustainability.
A key feature of this strategy is the introduction of Shariah-compliant financial instruments, such as long-term fixed and variable-rate Sukuks. These instruments are designed to attract Islamic investors, with a target of increasing the share of Islamic financing in government securities to 15% by FY2026, up from 11% in FY2024. The move is part of a broader strategy to tap into a growing market for ethical and socially responsible investments, which are increasingly sought after by investors globally.
The government is also focusing on sustainable financing options, including the issuance of domestic green Sukuks and asset-light Sukuks. These instruments will help fund projects with positive environmental impacts, such as renewable energy initiatives and climate adaptation projects. The issuance of Domestic Listed Green Sukuks is scheduled for 2025, and the government aims to expand its green financing portfolio as part of its long-term environmental and economic goals.
In addition to these domestic measures, Pakistan is exploring new external financing options to support its fiscal strategy. One of the most notable steps in this regard is the planned issuance of Pakistan’s first-ever Panda Bond in the Chinese market. The Panda Bond, a type of bond issued in China by a foreign entity, will allow Pakistan to take advantage of lower yields and financing costs available in the Chinese capital market. This move is part of a broader strategy to tap into diverse international markets and access funding at competitive rates.
As part of its fiscal reforms, the government is also focusing on strengthening tax collection systems and expanding the tax base. The introduction of measures to improve fiscal institutions and ensure long-term debt sustainability is central to Pakistan’s strategy for reducing its reliance on external borrowing. The government is working to reform federal-provincial fiscal relations through the National Fiscal Pact, which aims to improve revenue generation across diversified sources. These reforms are crucial for enhancing overall revenue mobilization and ensuring that the country’s fiscal health improves in the long run.
The government’s fiscal performance has shown positive results, particularly in revenue collection. During the first half of FY2025 (July to December), the Federal Board of Revenue (FBR) recorded a significant 25.9% year-on-year increase in tax collections, reaching Rs5,624.9 billion, compared to Rs4,469.2 billion in the previous year. This growth has been broad-based, driven by both direct and indirect taxes, and signals an improvement in the efficiency of Pakistan’s tax collection systems.
Overall, the government’s move towards a Sovereign Sustainable Finance Framework represents a significant shift towards a more responsible and diversified approach to financing. By combining sustainable financial instruments with fiscal reforms and international capital market access, Pakistan aims to reduce its debt servicing burden while simultaneously promoting environmental sustainability and economic growth. The success of these measures will be crucial for the country’s long-term fiscal stability and its ability to meet its development goals.