Azhar Saeed
Pakistan is now paying the price for decades of fiscal indiscipline, low productivity, and misguided borrowing. As of 2025, its total public debt stands at approximately PKR 80 trillion, or around USD 285 billion, while annual debt servicing obligations have surged to over PKR 7 trillion, which is more than half the federal budget. This leaves little room for development spending, and almost none for climate resilience, industrial upgrading, or human capital investment. Yet the deeper crisis lies not just in the scale of our debt, but in the structure and logic of how we borrow.
Pakistan today is stuck in a deeply disadvantageous position. With a sovereign credit rating of B−, the country falls into the high-yield or “speculative grade” category, just one notch above default. But unlike countries such as Sri Lanka or Zambia, which defaulted and were able to restructure, Pakistan continues to service its debt fully. This prevents us from negotiating relief, while offering no credibility dividend in return. Conversely, countries like India (BBB) and Vietnam (BB+) can borrow at relatively modest interest rates, often below 6% for long-term bonds. Even Uganda, with a similar B− rating, enjoys a higher concessional share in its debt portfolio due to stronger multilateral engagement and better governance signals. Pakistan, by contrast, finds itself in a no-man’s-land where it pays double-digit yields on its bonds but gains no market confidence or debt restructuring leverage in return.
In this context, Pakistan has recently leaned on so-called “green” sukuk, issued under its Sustainable Investment Sukuk Framework. The first such issuance, the Ijarah Green Sukuk, was priced at a net rental rate of 10.64%, almost identical to conventional domestic government bonds. In other words, we are borrowing green at junk rates. Worse, the proceeds from these sukuk are earmarked for public infrastructure projects such as dams and hydropower plants, but without any robust frameworks to measure or verify climate outcomes. There are no publicly disclosed impact metrics, no independent third-party assessments, and no financial penalties for underperformance. The entire exercise rests on a use-of-proceeds model, one that assigns a green label to capital flows without tying financing costs to actual results. Given the weak capacity of implementing agencies, poor coordination between ministries, and absence of impact verification, the risk of greenwashing is real. Far from being a breakthrough, these sukuk may be simply deepening our debt stress without delivering material benefits to climate adaptation or emission reduction.
There is, however, a more strategic and credible way to finance our transition: performance-based bonds, including Sustainability-Linked Bonds (SLBs) and Development Impact Bonds (DIBs). These instruments tie borrowing costs to the achievement of clearly defined performance targets. If the issuer meets sustainability goals, such as reducing emissions, improving energy efficiency, or increasing access to clean energy, it retains access to lower interest rates. If it fails, the coupon rate steps up. This means the financial burden is not frontloaded on the taxpayer; it is conditional, dynamic, and results-based.
The advantages of such instruments are significant. First, performance-based bonds have been priced in the international market at 6–7% for emerging markets, markedly cheaper than the 10–11% yields Pakistan is currently forced to accept. Investors are willing to accept lower returns when outcomes are clear, measurable, and externally verified. Second, these instruments place part of the performance risk on investors. If Pakistan fails to meet its targets, it pays more; if it delivers, it saves. This is much better than our our current approach, where we pay a premium no matter what results are achieved. Third, the very structure of these bonds forces stronger governance. Issuers must set clear KPIs, monitor performance rigorously, and report transparently, strengthening institutional capacity in the process. Finally, performance-based structures rebuild credibility in capital markets. They send the right signal that we are serious about linking debt to climate related outcomes, and that we are ready to be held accountable.
This approach is especially relevant when we consider where Pakistan could deliver measurable results at scale. A recent World Bank report, “Pakistan Energy Efficiency: Industrial Efficiency and Decarbonization (EE&D),” identifies five priority sectors that account for the bulk of industrial energy consumption and emissions: textiles, cement, fertilizer, steel, and paper & pulp. Industry overall consumes 37% of final energy and more than 70% of the country’s coal use. Pakistan’s industrial carbon intensity is 38% higher than North America’s and 50% above the EU average. Yet the World Bank report also shows that significant energy savings and emission reductions are achievable through commercially available, cost-effective technologies.
In the textile sector, particularly in dyeing and finishing operations, energy savings of 50–60% are possible through interventions such as compressor heat recovery, wastewater heat reuse, and cold-pad batch dyeing. Cement plants can deploy waste heat recovery systems and adopt low-clinker technologies to reduce energy consumption by 20–30%. Fertilizer and steel industries can achieve 3–10% reductions through insulation, variable-frequency drives, and process upgrades. These are not speculative technologies; they are proven, and they are already deployed in comparable countries.
What Pakistan lacks is not knowledge, but financing mechanisms that can channel capital into these upgrades without adding further fiscal stress. This is where performance-based bonds could play a transformative role. Imagine a $500 million Sustainability-Linked Bond issued by Pakistan, with KPIs such as reducing industrial energy intensity by 10% over five years, retrofitting at least half of all cement and textile plants with energy-efficient systems, and cutting sector-wide emissions by 8–10% by 2030. If these targets are met, the government may pay 6 to 7 % interest. If they are missed, the rate steps up to may 7.5 or 8%.
Proceeds from such a bond could be directed to a concessional lending facility administered by the Ministry of Finance in collaboration with the State Bank, National Energy Efficiency and Conservation Authority (NEECA) and commercial banks. This facility would provide low-interest loans – say, at 5% to 6% – to firms in the five industrial sectors to adopt energy-efficient technologies. In textiles, this could fund compressor retrofits and wastewater heat recovery units. In cement, it could support the installation of waste heat recovery systems and fuel-switching technologies. Steel and fertilizer plants could access financing for CHP units, insulation, and even early-stage green hydrogen pilots.
Verification and monitoring would be carried out by a third-party evaluator, reporting annually to both bondholders and the public. In this way, the entire cycle of debt issuance, implementation, and repayment is tied to performance, not merely paperwork or intent.
The benefits would be far-reaching. Fiscally, Pakistan could access debt at 3 to 4 percentage points lower than what we currently pay, reducing our overall debt servicing burden. Economically, energy-efficient industries would become more competitive, especially in light of the EU’s Carbon Border Adjustment Mechanism. Environmentally, we would make measurable progress toward our NDCs and energy transition targets. Institutionally, we would build capacities in monitoring, verification, and strategic financing. And globally, we would build credibility as a country capable of linking finance to outcomes.
Pakistan is not Uruguay. We cannot buy back bonds at 30 cents on the dollar. Nor are we India or Vietnam, able to borrow at 4–5% on account of sound fundamentals. But we can do something smarter – we can borrow less expensively, by offering performance in return.
