TAHIR AMIN

ISLAMABAD: Pakistan should institutionalise its Sustainable Financing Framework (SFF) in the Public Sector Development Programme (PSDP), progressively reduce reliance on multilateral guarantees and link future Panda Bond issuances with verifiable sector reforms, the Asian Development Bank (ADB) has recommended in its latest brief.

The ADB’s recommendations came after Pakistan’s inaugural CNY 1.75 billion (USD 258 million) bond attracted investor orders exceeding five times the issue size.

The ADB said Pakistan’s first Panda Bond, backed by guarantees from the ADB and Asian Infrastructure Investment Bank (AIIB), secured a 2.5 percent coupon and an estimated all-in funding cost of 3.22 percent, while establishing a benchmark for future access to China’s onshore renminbi bond market.

In its latest brief, Financing Sustainable Infrastructure in Pakistan: Leveraging Panda Bond, Partial Credit Guarantees, and Sector Reforms, the ADB said the successful transaction had opened an additional financing channel for Pakistan and provided a platform for follow-on issuances linked to reforms.

The bond was issued on May 15, 2026, with a three-year tenor and attracted CNY 8.8 billion in orders against the CNY 1.75 billion issue, making it more than five times oversubscribed.

The ADB said the strong demand demonstrated investor acceptance of the transaction structure and strengthened confidence in the government’s broader CNY 7.2 billion (USD 1 billion) Panda Bond Programme for fiscal years 2026–28.

The bond achieved a domestic AAA rating in China’s onshore market with the ADB and AIIB guarantees covering up to 95 percent of the bond amount.

Under the arrangement, the ADB guarantees approximately USD 140 million equivalent of principal plus its pro-rata share of accrued interest, while AIIB guarantees up to USD 110 million equivalent of principal and its corresponding share of accrued interest.

The ADB noted that Pakistan’s standalone sovereign credit profile was not sufficient to access the targeted institutional investor base in China’s onshore bond market.

The guarantees provided the credit enhancement required to achieve the domestic AAA rating, allowing Pakistan to tap institutional investors in the renminbi market.

The ADB said the transaction was significant because, unlike earlier guaranteed Panda Bond issuances that relied on 100 percent indemnity of principal and interest, Pakistan used an ADB-AIIB co-guarantee structure covering less than 100 percent while still achieving an AAA rating.

It said this established an important precedent for multilateral development banks to help emerging-market sovereigns mobilise private capital without providing a full guarantee wrap, provided that the transaction structure, credit enhancement and policy framework remained credible to investors.

The ADB said the pricing compared favourably, on a swap-adjusted basis, with Pakistan’s USD 750 million three-year US dollar Eurobond issued the previous month.

The bond also created an AAA-rated benchmark in China’s onshore market and established relationships with 14 institutional investors, potentially providing a foundation for future issuances at lower coupon rates and with reduced guarantee coverage.

The ADB said the benefits extended beyond pricing, as access to China’s onshore renminbi market would help Pakistan diversify its external financing sources and reduce reliance on traditional international capital markets.

The ADB recommended that Pakistan use the inaugural transaction as a platform for improving the quality of its public investment programme rather than treating it merely as a financing exercise.

It called for the SFF to be institutionalised within the PSDP through a permanent screening and tagging function in the Ministry of Finance and Planning Commission.

This would ensure that eligible green and social projects are identified at the PSDP formulation stage rather than being retrofitted to meet financing requirements at the time of bond issuance.

The ADB also recommended that Pakistan progressively optimise the guarantee structure by targeting lower guarantee coverage ratios and longer tenors in subsequent issuances.

The bank further recommended that Pakistan publish its first SFF allocation and impact report on schedule, with independent verification, to establish the disclosure track record required to support future issuances.

It said future Panda Bonds could also be linked to policy-based reforms, particularly in sectors such as water, where market financing could be tied to verifiable government actions.

Proceeds from the inaugural Panda Bond are ring-fenced under Pakistan’s SFF and can only finance eligible green and social expenditures within the federal PSDP.

The eligible projects include a national telemetry system for real-time discharge monitoring of the Indus Basin Irrigation System, strengthening of electricity distribution networks and health infrastructure.

The ADB said the SFF imposes additional selection and execution discipline on the PSDP by requiring eligible projects to meet environmental and social criteria and by introducing proceeds tracking, results measurement and impact reporting.

The bank said its and AIIB’s due diligence also provided additional quality assurance through economic and financial, environmental and social, technical and climate screening.

The ADB highlighted the water sector as a potential area for linking future Panda Bond financing with policy reforms. The proceeds will help install real-time monitoring on the 26 largest macro-canals of the Indus Basin Irrigation System. The ADB said Pakistan could build on this investment through a future Panda Bond linked to water-sector policy actions.

These could include adoption of a national water-accounting framework, publication of provincial water accounts, groundwater regulation, improved irrigation water productivity and volumetric measurement at canal level.

The bank also identified completion and operationalisation of provincial water laws as a potential reform area.

It noted that all four provinces were at different stages of establishing water legislation, with drafting under way in Balochistan, approval in Sindh, establishment of implementing institutions in Khyber Pakhtunkhwa and enactment, with operationalisation pending, in Punjab.

The ADB said the SFF could help address a longstanding weakness in Pakistan’s PSDP by creating a screened pipeline of climate-tagged projects supported by stronger due diligence and measurable environmental and social outcomes.

It said the prospect of successive market issuances could encourage federal agencies to prepare more bankable projects with robust project selection, due diligence and verifiable sustainability credentials.

The bank recommended linking future market access to the quality and sustainability of Pakistan’s public investment pipeline.

It also suggested extending guarantees from project financing to policy reform, allowing future financing to be tied to measurable reforms in institutions responsible for infrastructure and public service delivery.

The ADB said Pakistan’s macroeconomic conditions had improved from the severe balance-of-payments and fiscal pressures experienced in 2022–23 following IMF-supported reforms, fiscal consolidation, tighter monetary policy, exchange-rate adjustment and efforts to rebuild foreign exchange reserves.

However, it cautioned that Pakistan remained exposed to significant fiscal, external and financing constraints, making continued macroeconomic discipline and access to longer-term financing important.