ISLAMABAD: Expecting rollover of billions of dollars from the friendly countries, including Saudi Arabia, China and the UAE, after maturity period of one to three years, the government has firmed up plans to launch Sukuk and Eurobonds in the international market as well as further expanding reliance on commercial borrowings in dollars to bridge the financing gap on the external front.
According to Medium Term Strategy Paper, which is expected to be unveiled by Minister for Finance Asad Umar next week but exclusively available with The News, arrangements for foreign currency deposits for balance of payment support have been done through China, Saudi Arabia and the UAE. “While these deposits are for a term of one to three years, they are expected to be rolled over depending on Pakistan’s requirements. However, our requirement for bilateral support of this nature are expected to diminish as the economy stabilizes,” it states. The paper does not mention anything about seeking balance of payment support from the IMF.
It states that the government’s foremost objective is to avoid default on its external debt servicing. The government, it states, has worked hard to mobilize additional financing from friendly countries in the form of short-to medium-term loans, deferred payment on imported oil, and temporary deposits in the central banks. The Saudi Arabia has agreed to provide $6 billion assistance package, US $3 billion in short loan and $3 billion in the shape of deferred payment on oil imports. Similarly, the UAE government has agreed to provide another $3.2 billion worth of oil on deferred payment basis and another $3 billion placement in the SBP account, whereas China may deposit an additional $2.5 billion with the State Bank of Pakistan to strengthen Pakistan’s foreign exchange reserves.
These efforts have helped (i) avert immediate threat of default on payment obligations; (ii) avoid painful sharp adjustment; and (iii) provide the fiscal space and time to pursue a balanced strategy of macroeconomic stabilisation and structural reform, it stated. The package of stabilisation and structural measures was rolled out. Exchange rate was adjusted by an additional 10 percent and policy interest rate was increased. On September 18, 2018 the government announced a revised budget with additional tax and expenditure measures to bring the fiscal deficit down from 6.6 percent of GDP in 2017-18 to 5.6 percent in 2018-19, and to lower the current account deficit from 6.1 percent of GDP in 2017-18 to 4.6 percent. To curtail the surging imports, additional regulatory duty was imposed on a large number of non-essential imported items.
There is some evidence that these measures have started to work. Balance of trade in the first 6 months of 2018-19 was almost US $2 billion lower compared to the first six months of 2017-18. Moreover, a sizeable adjustment has already been made in the interest and exchange rates to contain aggregate demand and ease the pressure on the balance of payments. In addition, adjustments have been made in electricity and gas prices to improve the financial health of the energy utilities, reduce their burden on the budget and part-finance the huge overhang of power sector “circular debt”. The government will not hesitate to take additional strong measures if imbalances do not decline. The government is trying to arrange additional financing to cover the financing gap in the immediate-run, and increase the level of foreign exchange reserves to a level which is consistent with a sustainable balance of payments framework. In this regard, it has taken several decisions which will be implemented in next few months. Some of these include:-
Diaspora Bonds: In the first phase, scrip less instrument known as the Pakistan Banao Certificates was already issued, which is expected to bring in substantial resources from non-resident Pakistanis across the world. In the second phase, listed bonds that can be traded in the secondary market will be issued for the Pakistani diaspora.
Foreign Currency Sukuk: The sukuk will be issued to capitalize on the rapidly growing potential for Shariah-compliant instruments. The Sukuk are expected to gain substantive response from Shariah-complaint banking and non-banking financial institutions.
Euro Bonds: Issuance of Euro bonds is also expected to gain a good response from investors as in the case of previous bond issues. This response will further strengthen as Pakistan’s economy stabilizes.
Market Financing: Pakistan has shown a good ability to obtain credit facilities from international commercial banks at very reasonable rates. As the economy stabilizes, the potential to raise resources from commercial banks will further expand.
The exchange rate is one of the most important prices and is determined by underlying economic fundamentals. These fundamentals ensure that it would adjust to its equilibrium value over the long run. As mentioned earlier, Pakistan’s approach to exchange rate management has been uneven — reflecting both the realities of a thin foreign exchange market, and the overriding desire to avoid unnecessary volatility in the foreign exchange market and avoid fiscal cost of exchange rate adjustment, even when it was needed. This has led to persistent overvaluations repeatedly contributing to higher trade deficit. The recent pressures on external fronts are no exception: a manifestation of misaligned exchange rate.
Against this background, the principal idea now is to enshrine an exchange rate policy which enhances competitiveness of the Pakistani exports, by avoiding the persistent overvaluation of rupee. Accordingly, the rupee has depreciated around 24 percent since November 2017 and currently hovering around Rs139 per USD. The depreciation has moved the exchange rate to a level, which is more reflective of economy’s medium-term needs and market conditions while at the same time minimizing disorderly fluctuations.
Going forward, the near-term goal of this policy is to move towards a flexible regime with a transparent auction-based system with clearly defined rules; and having a safety-net in the form of an allocated intervention budget with internal controls to mitigate the unwarranted volatility. This mechanism would help ensure a healthy two-way movement in the PKR exchange rate, and would be compatible with the implementation of flexible inflation targeting under the SBP vision 2020, it concluded.