EDITORIAL: Special Secretary Ministry of Finance Kamran Ali Afzal informed a select group of journalists that the government intends to generate one billion dollars from the issuance of Eurobonds. A Eurobond is defined as a fixed-income debt instrument denominated in a different currency than the local currency of the country where the bond is issued and hence issuing a Eurobond in dollars is legit; yet it is also baffling as to why the dollar instead of the Euro is under consideration especially given that the dollar is projected to lose value due to the continued heavy onslaught of Covid-19 on the US economy coupled with the lack of clarity for a seamless transition from a Trump to a Biden presidency.
Ishaq Dar as the Finance Minister in the last PML-N government projected the issuance of Eurobonds/sukuk as a very positive step indicative of the country finally entering the debt equity market; however it must be emphasized that Eurobonds/sukuk are, in essence, external debt equity and therefore their issuance raises the country's total debt. And it is issuance of such bonds that partly contributed to the country being heavily debt ridden at the time that the Khan administration took over the reins of government - to the tune of around 95 billion dollars. Today as per the State Bank of Pakistan website, Pakistan's external debt and liabilities have gone up to 113.8 billion dollars - a rise of 20 percent in just two years and two months. And needless to add at this rate the country's total external indebtedness would rise by another 25 to 30 billion dollars by the end of the Khan administration's tenure - a projection that is in synch with that of the incumbent economic team leaders who, in the Letter of Intent submitted to the International Monetary Fund (IMF), a prerequisite for approval of the 6 billion dollar Extended Fund Facility programme, envisaged total external debt requirement of 38.6 billion dollars for thirtynine months, the duration of the programme - an amount that has since risen by 2 billion dollars to help Pakistan fight the Covid-19 impact.
The second area of concern is the rate at which the Eurobond would be issued. The Special Secretary Finance noted during his interaction with journalists that there is an expectation that the Eurobonds would be issued at relatively low interest rates. He wisely did not dwell on putting a value to these expectations. Today, Pakistan's foreign exchange reserves are largely shored up by debt, similar to what was evident during Ishaq Dar's tenure which accounted for a return as high as 8.5 percent with 6.5 percent the lowest interest payable on sukuk issued during 2013-18 - more than double the then prevailing market rate.
The intent to issue one billion dollar worth of Eurobonds does not come as a surprise because around 247.5 billion rupees (a little over 1.5 billion dollars) has been budgeted from Eurobonds/sukuk for the current year. It is pertinent to recall that the government requested external debt deferment (interest and principal as and when due) for only official debt for one year - an offer by the rich countries to help debtor countries meet the Covid-19 challenge - for had it requested a deferment on all debt the interest on not only Eurobonds/sukuk but also on commercial borrowing would have jacked up enormously. In addition, with the IMF programme stalled due to the politically extremely challenging conditions that the Fund is reportedly insisting on the Eurobond rate would be a lot higher than if the government was on active programme.
The government has also budgeted 165 billion rupees as Saudi oil facility (which has yet to be extended) and 211 billion rupees from the IMF as budgetary support (which remains stalled). In short, the budgeted external revenue inflows maybe compromised by more than the rise in remittances which would compel the government to raise rates to meet its borrowing requirements. A better option would be to massively curtail expenditure as total budget outlay of 7.2964 trillion rupees for the current year, although indicated as 11 percent lower than the revised estimates of the year before, is mainly sourced to deferment of around 1.2 trillion rupees on account of foreign loan repayment, and a cut of around 50 billion rupees for Public Sector Development Programme.
Copyright Business Recorder, 2020