Weakening US Dollar Raises Risks for Pakistan. Pakistan’s external debt profile remains heavily reliant on multilateral and bilateral creditors, with a significant portion of the country’s debt being owed to international lenders. As of the latest estimates, around 56 percent of Pakistan’s total external debt, which stands at approximately $92 billion, is sourced from these creditors. This situation has raised growing concerns, especially in light of recent developments surrounding currency volatility and its potential impact on Pakistan’s debt servicing obligations.
Economists are increasingly cautious about the weakening of the US dollar against other major global currencies, a trend that could exacerbate Pakistan’s external debt burden. While this shift in exchange rates might appear to be beneficial for some economies, for Pakistan, it carries the risk of higher external debt liabilities in rupee terms. Additionally, the country’s debt-to-GDP ratio could come under more pressure if the US dollar continues to weaken against the Pakistani rupee.
Impact of the US Dollar Weakening
In the last few years, Pakistan’s external debt has hovered around the $130 billion mark, largely driven by the strengthening of the US dollar against major currencies like the euro, Japanese yen, and British pound. The appreciation of the US dollar, particularly in relation to the Pakistani rupee, helped manage debt servicing costs, as the country’s debt remained denominated in dollars.
However, the recent softening of the US dollar has added new uncertainty for emerging economies like Pakistan, which have substantial foreign currency obligations. As the US dollar weakens, Pakistan’s external debt, when converted to rupee terms, will increase. This could lead to higher repayment costs for the government, thereby straining fiscal resources.
Why the US Dollar Matters
The value of the US dollar plays a critical role in determining how much external debt Pakistan needs to service. A weaker dollar means that more rupees will be required to meet the same debt obligations in foreign currency. This increases the cost of servicing Pakistan’s external debt and affects its fiscal health, especially when the economy is already dealing with challenges like inflation, low reserves, and a growing debt burden.
Pakistan External Debt Outlook
According to the Ministry of Finance, Pakistan’s external debt has been increasing steadily. By June 2025, the country’s external debt was reported to have grown by 6 percent year-on-year, reaching $91.8 billion, an increase of approximately $5 billion. However, Pakistan’s external debt showed a slight decrease of 0.4 percent in the first quarter of FY26, standing at $91.4 billion by September 2025.
Despite this slight decrease in the first quarter, the overall trend of growing external debt is concerning. The primary drivers of this increase have been multilateral development partners, including institutions like the International Monetary Fund (IMF), which saw an 8.7 percent rise in borrowing, totaling nearly $4 billion. This increase reflects Pakistan’s growing reliance on international financial institutions to meet its funding needs.
Borrowing from Commercial Banks
In addition to borrowing from multilateral institutions, Pakistan has also increased its reliance on commercial banks. According to reports, borrowing from commercial banks increased by $1.6 billion, mainly due to a $1 billion loan secured against an Asian Development Bank (ADB) policy-based guarantee. This borrowing approach helps meet short-term financing needs but also contributes to the overall increase in external debt.
Economic and Fiscal Implications
The weakening of the US dollar, combined with rising external debt, poses serious risks to Pakistan’s fiscal management. The country’s debt-to-GDP ratio could come under strain as debt servicing costs increase, requiring more fiscal resources to be allocated for external debt repayment rather than for critical areas like infrastructure, healthcare, and education.
Increased Debt Servicing Costs
As the US dollar weakens, Pakistan’s debt servicing costs will rise, placing additional pressure on the government’s fiscal policy. Higher debt servicing costs could lead to budget deficits, and Pakistan may need to either cut spending in other areas or borrow more to meet its obligations. Both options could have negative consequences for the economy, potentially affecting social welfare programs and key development projects.
Strain on Currency Reserves
A weakening US dollar could also contribute to further depletion of Pakistan’s foreign exchange reserves. With higher costs of servicing external debt, the government might have to dip into its foreign reserves to meet obligations, leaving the country more vulnerable to external shocks and reducing its ability to manage short-term financial crises.
Key Factors Influencing Pakistan’s External Debt Outlook
Several key factors will continue to influence Pakistan’s external debt and its ability to manage its obligations. These include:
- Currency Movements: The value of the US dollar relative to the Pakistani rupee will be a critical factor in determining the cost of servicing foreign debt. A sustained decline in the dollar could further increase debt obligations, particularly in rupee terms.
- Borrowing Patterns: Pakistan’s increasing reliance on multilateral and commercial borrowings to meet its financing needs is another key consideration. While borrowing from institutions like the IMF and the ADB helps in the short term, it also increases the country’s debt stock, which must be managed carefully.
- Global Financial Conditions: Global economic conditions, including interest rates, inflation, and geopolitical stability, will affect the availability and cost of financing for Pakistan. A rising interest rate environment in global markets could increase the cost of external borrowing.
- Debt Repayment Capacity: The ability of Pakistan’s government to generate enough foreign exchange earnings through exports and remittances will also play a significant role in managing debt. A weakening currency may strain the country’s ability to earn the foreign exchange needed to repay debt, while increasing inflation could reduce the purchasing power of the rupee.
Looking Ahead: What Does the Future Hold?
Pakistan’s external debt situation remains precarious, with the risk of further currency depreciation and rising debt servicing costs. Economists argue that while the country has taken steps to manage its fiscal deficit, it will need to find a more sustainable approach to debt management moving forward.
To reduce the impact of currency volatility and manage its debt more effectively, Pakistan will need to:
- Diversify its sources of financing to reduce dependence on foreign debt.
- Increase exports and remittances to strengthen the country’s foreign exchange reserves.
- Implement structural reforms in the economy to enhance long-term growth and fiscal stability.
Conclusion
The weakening US dollar is a new challenge for Pakistan’s external debt management, raising concerns about rising debt servicing costs and increasing financial pressure. With the country’s external debt stock approaching $92 billion and growing reliance on multilateral and commercial borrowing, Pakistan faces an uphill battle in managing its foreign obligations.
