Pakistan’s $3 Billion Illusion: the Federation Fractures at Home

Pakistan has reason to feel that its international fortunes have changed. A country that only a few years ago appeared perilously close to sovereign default has returned to international capital markets, improved relations with Washington, strengthened ties with Gulf capitals and recovered some of the diplomatic relevance it had lost during years of political and economic crisis.

The latest symbol of this recovery is financial. Islamabad has raised $3 billion through a dual-tranche Eurobond issue, the largest single international capital-market transaction in Pakistan’s history. Orders reportedly approached $6 billion. The government has presented the sale as another vote of confidence in Pakistan’s economic recovery.

The price tells a different story. Pakistan will pay 7.5 per cent on the five-and-a-half-year tranche and 7.9 per cent on the ten-year bonds. International investors are prepared to lend Pakistan money again, but at rates reflecting the considerable risks that remain attached to the country.

Behind Islamabad’s improving international profile lies a federation under growing internal pressure. Balochistan remains caught in insurgency and repression, from CPEC to Gwadar.  Pakistan-occupied  “independant” Kashmir has witnessed deadly unrest. Khyber Pakhtunkhwa remains under enormous security pressure. In Sindh, arguments over water, resources, provincial autonomy and now the territorial integrity of the province are becoming increasingly bitter.

The contradictions were on display in the Sindh Assembly last week. For four days, legislators fought over proposals for new provinces and administrative units. The ruling Pakistan Peoples Party rejected any division of Sindh. Opposition legislators from MQM-P, PTI and Jamaat-e-Islami argued for greater administrative decentralisation, accusing the PPP government of using fears about the province’s division to distract from corruption, poor governance and inadequate devolution.

MQM-P legislator Rashid Khan told the Assembly that nobody had proposed changing Sindh’s borders. Opposition Leader Ali Khurshidi argued that the demand was instead to empower Sindh’s existing divisions financially and administratively.

The confrontation ended with the PPP pushing through a resolution rejecting not only the division of Sindh but also the creation of new administrative units. MQM-P and Jamaat-e-Islami walked out. Chief Minister Murad Ali Shah declared that there could be “no compromise on Sindh’s geographical unity”.

Behind the parliamentary dispute is a far older and more dangerous question. Who controls Sindh’s water, land and resources, and how much power should Islamabad and the Punjab-dominated political and security establishment exercise over Pakistan’s provinces?

The Sindh-Punjab Fault Line

Water has brought these tensions into the open. Sindh, situated downstream on the Indus, has long complained that Punjab consumes a disproportionate share of the river system. The proposed construction of six canals associated with agricultural development in Cholistan turned those grievances into a mass political movement in 2025.

The controversy united groups that rarely stand together. The PPP, Sindhi nationalists, lawyers, farmers and civil-society organisations opposed the project. The Sindh Assembly unanimously rejected it. The dispute reached the National Assembly and Senate.

The grievances continued into 2026. In June, Sindh’s irrigation authorities complained that the province was receiving approximately 40 per cent less water than it required in early June, while link canals diverting water towards Punjab continued to operate. At Sukkur Barrage, Sindh’s seven canals were reported to be receiving around 40 per cent less than their combined allocation while Punjab was drawing above its allocation.

Punjab Chief Minister Maryam Nawaz has hardly helped calm the dispute. During an earlier confrontation with the PPP over the Cholistan canals, she bluntly asserted that the water intended for the project was “Punjab’s water”. Her remarks provoked outrage within the PPP and contributed to a walkout by its parliamentarians from the National Assembly.

Speaking in Lahore on September 5, Maryam Nawaz said that the security threat to Punjab came less from neighbouring countries than from Pakistan’s own neighbouring provinces. “The unfortunate thing is that the threat Punjab faces comes less from my neighbouring countries and more from my neighbouring provinces,” she said.

The opposition alliance Tehreek Tahafuz Ayin-i-Pakistan condemned the statement and demanded that she withdraw it and apologise to the people of the other provinces.

Coming from the chief minister of Pakistan’s largest and politically dominant province, the prime minister’s niece, the remark is quiet shocking. Pakistan’s political establishment routinely invokes national unity when confronted with dissent in Balochistan, Sindh or Khyber Pakhtunkhwa. Yet the chief minister of Punjab is herself describing neighbouring Pakistani provinces as a greater security threat than foreign states. It doesn’t help that the President of the country, Asif Ali Zardari, is from Sindh and his party rules Sindh.

The language illustrates how strained Pakistan’s federal compact has become. Sindh sees Punjab as consuming water to which downstream communities are entitled. Punjab’s chief minister describes threats emanating from neighbouring provinces. Sindhi politicians are warning against attempts to redraw provincial boundaries. The federal interior minister, meanwhile, insists that new administrative units will eventually have to be created. These are no longer arguments simply about bureaucratic efficiency.

Could Sindh Become Another Balochistan?

Sindh is not Balochistan. There is no comparable insurgency and it would be inaccurate to pretend that the two provinces face the same security environment.

The concern lies in the political processes that precede insurgencies: resentment over natural resources, distrust of the centre, accusations of economic exploitation, enforced disappearances, shrinking political space and the conviction that constitutional politics cannot protect provincial interests.

Many of these elements are already present in Sindh. Pakistan’s Human Rights Commission has repeatedly documented enforced disappearances, restrictions on dissent, extrajudicial killings and deteriorating law and order in the province. It has also warned that disputes over the Indus and canal construction have intensified inter-provincial grievances and threaten Sindh’s ecological and agricultural future.

Pakistani journalist and author Zahid Hussain warned during the mobilisation against the canal project that the controversy had “exposed the fault lines within the establishment-dominated system”. He argued that increasing centralisation was weakening Pakistan’s federal structure and that failure to resolve the dispute constitutionally risked damaging the unity of the federation.

Pakistani academic and commentator Aasim Sajjad Akhtar described the Sindh mobilisation as perhaps the province’s largest mass movement since the Movement for the Restoration of Democracy in the 1980s. He placed it alongside growing political discontent in Balochistan, Khyber Pakhtunkhwa, Gilgit-Baltistan and Pakistan-administered Kashmir, where disputes increasingly concern control over land, resources and political rights.

PPP parliamentarian Naveed Qamar offered an even more direct warning during the canal controversy. The party, he said, could resist the project or leave the political field open to “more violent and nationalist forces”.

That possibility should concern Islamabad. Balochistan shows where prolonged political alienation can lead. Decades of disputes over resources, provincial autonomy and political representation have become intertwined with enforced disappearances, separatist militancy and a heavily securitised state response.

Following a fact-finding mission, the Human Rights Commission of Pakistan identified enforced disappearances, shrinking civic space, weak provincial autonomy and impunity among the factors continuing to fuel “public alienation and political instability” in Balochistan.

Human-rights scholar Mahvish Ahmad has described the human consequences starkly, saying that in Balochistan it is difficult to find a family untouched by someone being killed or disappearing.

Sindh has not reached that stage. The danger for Pakistan lies in assuming that it never could.

Pakistan-Administered Kashmir Offers Another Warning

The unrest in Pakistan-administered Kashmir has demonstrated how rapidly apparently manageable grievances can turn into a crisis of legitimacy.

In June, at least 24 people, including 20 civilians and four police officers, were killed during nearly two weeks of demonstrations. More than 500 people were detained, roads were blocked, internet services were suspended and access for journalists was restricted.

A subsequent Human Rights Commission of Pakistan fact-finding mission traced the crisis to institutional distrust, restrictions on expression and an increasingly confrontational response by the authorities. It called for allegations of excessive and lethal force to be independently investigated and warned against using anti-terrorism laws to suppress political dissent.

Pakistani journalist Humza Jilani described “widespread anger in every pocket of the country”, manifesting itself differently in Punjab, Kashmir, Khyber Pakhtunkhwa and Balochistan. The underlying sentiment, he argued, was that citizens increasingly felt that the government did not represent their interests.

Balochistan, Kashmir and Sindh are very different political problems. Their grievances nevertheless converge around an uncomfortable question for Islamabad: how much faith remains in Pakistan’s federal institutions as mechanisms for resolving disputes with the centre?

Borrowing $3 Billion Does Not Cure Pakistan’s Economy

Against this domestic backdrop, Islamabad’s celebration of its $3 billion Eurobond issue appears premature. Pakistan has regained the ability to borrow internationally. It has also taken on another $3 billion of foreign-currency debt carrying interest rates approaching 8 per cent.

The IMF continues to regard Pakistan’s public debt as sustainable under its baseline scenario, but its assessments also point to substantial medium-term vulnerabilities, including high gross financing requirements, dependence on external financing, weak investment and persistent governance problems.

Pakistan also remains dependent on the IMF programme and external financial support. Its underlying economy continues to struggle with limited fiscal space, a narrow tax base, large debt-servicing requirements, energy-sector liabilities and insufficient investment to generate the employment required by its young and rapidly growing population.

The IMF itself identifies high living costs, youth unemployment, inequality and deterioration in governance as possible triggers for social unrest and political instability.

The successful Eurobond sale therefore says something quite specific. International markets no longer believe Pakistan is about to default. It does not mean that Pakistan has solved the economic problems that brought it close to default in the first place.

Islamabad’s Success Abroad and Crisis at Home

Pakistan has undeniably recovered some of its international relevance. Its diplomatic relationships have improved, investors have returned and the government can present the country abroad as more stable than it appeared three years ago.

At home, another Pakistan is visible. In Balochistan, an insurgency continues alongside enforced disappearances and an expanding security response. In Pakistan-administered Kashmir, political and economic grievances recently produced the deadliest unrest in years. Khyber Pakhtunkhwa remains exposed to terrorism and deep political confrontation. Sindh is fighting Islamabad and Punjab over water, resources, administrative authority and fears of territorial division.

Even relations between the provinces are being described in increasingly adversarial terms. When Punjab’s chief minister says threats to her province come more from neighbouring Pakistani provinces than neighbouring countries, the language of Pakistan’s internal politics has travelled a considerable distance from the rhetoric of national unity.

Islamabad can suppress protests, arrest activists and deploy security forces. It can also negotiate another IMF programme or sell another sovereign bond. Neither approach answers the political question running through Pakistan’s peripheral regions.

Can Pakistan remain a stable federation if increasingly large sections of its population believe that the centre controls their resources without adequately representing their interests?

Balochistan is the warning of what happens when that question remains unanswered for decades. Pakistan-occupied Kashmir has shown how rapidly economic grievances can acquire a wider political character. Sindh is now providing another warning, while the dispute is still overwhelmingly political.

Pakistan has convinced international investors to lend it another $3 billion. Convincing its own provinces that they have a future within the federation may prove considerably more difficult. For a nuclear power punching way above its weight, stability at home may be more important than leading Islamic coalitions.