EDITORIAL: This week marked the launch of 2.5 billion dollar three-tranche bond deal – one billion for five years at the rate of 6 percent (0.5 percent less than the initial guidance and 0.1 to 0.2 percent higher than the fair value), one billion dollars at the rate of 7.375 percent for 10 years (0.125 percent lower than the initial guidance and 0.345 to 0.445 percent higher than fair value) and 500 million dollars at 8.875 percent for 10 years (from 0 to 0.125 percent lower than the initial guidance and 0.125 to 0.225 percent lower than the fair value). This is borrowing pure and simple and must not be confused either with an investment inflow or higher confidence of the international market in the country’s economy. The need to raise money through issuing bonds is a function of the government’s budget deficit.
The rates at which the bond rates have been offered reflect three elements. First, the debt profile of the country. The PPP-led coalition government did not offer any foreign currency bonds during its tenure mainly because the rates on offer were considered too high. This did not deter the PML-N government and in 2014 the then finance minister, Ishaq Dar, issued 2 billion dollar Eurobonds – one billion dollars of five-year maturity at the rate of 7.25 percent (higher than the rates on bonds offered by debt-ridden Greece), one billion dollar 10-year bonds at the rate of 8.25 percent as well as one billion dollar five-year sukuk issued in 2016 at 5.5 percent. Ishaq Dar in 2017 noted that the PPP-led coalition government incurred a net debt of 7.833 trillion rupees (2008-13) which averaged a growth rate of 9.75 percent, adding that during the three years of the PML-N government the rise was 9.75 percent. In contrast, the Khan government inherited a much more debt-ridden economy; however, it broke all previous records in terms of incurring (i) domestic debt whose servicing rose by 21 percent July-December 2020 compared to the year before; and (ii) external financing which rose dramatically not only to repay past loans (debt and debt equity loans amounting to 17 billion dollars were repaid as per the Ministry of Finance) but an additional 5 billion dollars was borrowed to meet the rise in the government’s current expenditure.
Second, the issue of bonds in foreign currency and the rate offered is linked to the reform agenda of the administration and whether the country is on an International Monetary Fund (IMF) programme which provides a comfort level to the market players that the issuing country would keep on the clearly identified path to reforms. The fact that the bond issuance was delayed till the staff-level agreement and subsequent disbursement of the IMF tranche, is therefore no coincidence for without it the rates on offer would have had to be higher.
Pakistan was on the Fund programme from September 2013 to September 2016 and is currently on the Fund programme. Thus there is a need for investigating the rates for the issuance of bonds during Dar’s tenure that were higher relative to today in spite of the fact that the growth rate of the economy was higher during the PML-N tenure compared to today, raising questions about the rates on offer during the Dar tenure.
And finally, the need for issuing bonds is related to the available foreign exchange reserves; and disturbingly, as the trade deficit widens and remittance inflows are expected to reach a ceiling soon, Pakistan’s need for foreign exchange has risen that accounts for the decision to offer 2.5 billion dollar foreign currency bonds.
Desired sources of earning foreign exchange are from exports and remittances. Unfortunately, containing the historic current account deficit of 20 billion dollars was made possible through import suppression with a consequent impact on domestic productivity rather than from export promotion. The usual methods used to encourage exports; notably, an undervalued currency and competitive tariffs/fiscal incentives, have failed to jump-start the export sector though it did receive a temporary boost as export orders were diverted to Pakistan after India and Bangladesh went into a severe lockdown associated with the pandemic.
In this context, it must be recalled that before his electoral victory in July 2018, Imran khan had repeatedly stated that if elected his party would ensure the return of billions of dollars of ill-gotten wealth stashed abroad by the country’s political leadership. Two and half years into his tenure the Prime Minister must surely have realized by now that this process is neither simple nor straightforward and requires investigation techniques and prosecutorial expertise to not only convict the guilty but also ensure the return of the money. To achieve his objective the Prime Minister appointed Shahzad Akbar as his adviser, who has taken on the role of attacking opposition leaders based on National Accountability Bureau’s inquiries rather than his own, with no convictions to-date, and the money remitted by UK’s FCO to Pakistan on a case involving a real estate tycoon was used to adjust that tycoon’s dues under a Supreme Court verdict.
One would, therefore, hope that the Prime Minister takes serious cognizance of the performance of his team, especially the unelected team leaders he appointed, and evaluates whether the job they were assigned at the taxpayers’ expense, has been completed satisfactorily and if not to take appropriate mitigating measures.
Copyright Business Recorder, 2021