Money Matters

Chasing imperfection

By Magazine Desk
Mon, 10, 15

As the Pakistan Muslim League-Nawaz (PML-N) government floated yet another $500 million Eurobond last week, scathing queries immediately started reverberating from official and unofficial quarters.

As the Pakistan Muslim League-Nawaz (PML-N) government floated yet another $500 million Eurobond last week, scathing queries immediately started reverberating from official and unofficial quarters. The rationale of urgently opting for an exorbitantly high 8.25 percent rate on which the subscription has been finalised is being questioned.

Since there is no significant appetite in the international market because of the devaluation of the Chinese currency, coupled with its loss of $3 trillion in the stock market, criticism is mounting against the government for finalising  what is generally being termed an “ill timed” costly borrowing.

The previous Eurobonds offered in March 2014, was oversubscribed to $6 billion compared to the new $1 billion which the government decided to restrict it to $500 million as was originally planned.

Finance Minister Ishaq Dar had conceded that lukewarm market response for new dollar denominated Eurobond was due to the current international economic environment. Surprisingly, the government ignored the advice of the three lead mangers – Citibank, Deutsche Bank and Standard Chartered Bank – whose officials were opposed to entering into the current unenthusiastic international market.

Egypt recently borrowed $1.5 billion from the international market at six percent interest rate, so why Pakistan floated its bonds at 8.25 percent interest rate with 10 year maturity, is said to be a mystery.  Turkey, Sri Lanka, Malaysia, Philippines, and Gabon also raised funds from in the international market on less interest rate compared to Pakistan. After arrival from New York, the finance minister defended the launch of the new Eurobond coupon and said since the timing of the floatation was decided much earlier, it was not considered good to cancel it at the eleventh hour. A number of countries had cancelled their bond offering because of not finding the current international market very attractive. But Dar said that the prime minister wanted the ministry of finance to test the country’s worth in the worst situations and global market turmoil.

“The speed with which Pakistan is borrowing, I have no doubt in my mind that Pakistan is heading towards a debt trap and who knows when we are under severe burden of foreign debt after some time, international forces and players would rescue us on the condition of surrendering our nuclear assets,” warned a prominent PML-N leader Senator Anwar Baig.

Currently Pakistan, Baig said, owed $50 billion and when this amount reached $80 billion or so, the international financial institutions, which are tools of the bigger powers, will be offering any bailout package like that of Greece by asking to roll back the country’s nuclear programme. “Therefore we need to rely on our own resources and at the same time work for economic and political stability to avoid unnecessary foreign loans,” Baig said.

There is another argument given by the critics that had there been a real economic turnaround, institutional investors would have gone an extra mile to buy these Eurobonds. The clean bill of health being given by the donor agencies and rating agencies did not reflect the real picture of the economy. Also, the donor agencies led by the International Monetary Fund (IMF) are partners in crime by accepting what former governor central Bank Shahid Kardar termed “unashamed manipulation of figures” by the present government.

It is also said that huge borrowing cost attached to the new $500 million Eurobond subscription amply shows that the international investors do not believe the IMF reports that suggest large scale improvements in the economy.

Former finance minister in the previous PML-N government Dr Hafiz Pasha believes that the current situation in the emerging markets and a collapse of the Chinese market did not offer good opportunity to float these Eurobonds.

“I don’t understand the rationale behind such bond offering when the country is comfortable with its foreign reserves, though it mostly contain foreign loans,” Dr Pasha said, advising the government to avoid reckless borrowing.

He also criticised Secretary Finance Dr Waqar Masood’s recent statement that the country might seek another IMF loan programme after the expiry of the current three year $6.6 billion bailout package.

“Honestly I do not see any justification to borrow funds on as high as 8.25 percent interest rate,” Dr Pasha said, adding that without the lifeline of increased exports, the government would never come out of the burden of more and more foreign debt. This is not a good economic practice to retire previous debt by seeking more loans. “This is a vicious circle which will not take you anywhere, so better concentrate on exports which is your real life line.”

In recent years, there had been more focus on retiring debt burden, especially by privatising the state sector entities. But since there is no improved international environment available for privatisation nor real efforts are being made by the privatisation minister, who looks more busy fighting political fire for the government on Television shows, no plausible success could be achieved on this front as well.

Insiders maintain that the finance minister was hopeful to raise enough money through the floatation of Eurobonds, particularly after getting a certificate from the IMF about Pakistan’s improved macroeconomic indicators along with upgrading by the credit rating agencies. Since Pakistan currently has better security conditions due to the army led operation against militants and terrorists, the finance minister was hoping to get a good response for the Pakistani bonds.

However, it did not happen, and he conceded in New York that with the overall international business climate along with the devaluation of the Chinese currency, Pakistan did not get the required response from the international investors. 

Today, there is a larger consensus in the country that the continued rise in the debt profile was not at all good for the health of the economy, and that, without enhancing exports and revenues, the country cannot escape the coming horrifying debt trap. Many believe that overly optimistic estimates must have given a rude shock to the economic managers by not having a better response for the new Eurobond venture. Raising money from the international market on significantly higher interest rate like that of 8.25 percent is largely contributing to foreign indebtedness, as government after government adopted  the easy road of seeking external loans, instead of focusing on fundamental and essential reforms to enhance the country’s resource mobilisation position.

It is also being said that the government had to opt for these bonds because it had already committed to the IMF, failing which they would not have been given waivers, particularly on fiscal deficit and revenue shortfalls.

Former governor central bank governor Shahid Kardar is wondering about the timing of the bond offering and said that it should have been postponed. “You tell me, has anyone appreciated the timing for offering these bonds? In fact there was no justification to borrow funds on a high 8.25 percent interest rate.” He said the way the government was recklessly borrowing, “God knows what would happen to this country.”

He asked why the government should be borrowing at a high interest rate when globally, the rates were low. “Expecting oversubscription under the present international economic environment is being too naïve and I am surprised there was nobody to give any advice to the government.” 

Former advisor to the ministry of finance Sakib Sherani termed it a “setback” for not having a good response for Eurobonds and said for him it was a mystery to offer bonds at this stage when reserves position was somewhat improved compared to a few months ago. “But partly, I would blame the IMF for pushing the government to borrow through bonds at this point in time,” Sherani said. He regretted the borrowing on higher mark-up and called it a bad choice, which should have been avoided.

Total liquid foreign reserves stood at $18.5 billion (exactly 18,500.8 million) on September 29, 2015 which included $13.4 billion (exactly 13,496.2 million) held by the central bank and $5 billion (exactly 5,004.6 million) net foreign reserves held by the commercial banks.   

Top economist Dr Ashfaue Hasan Khan said there was a serious reality gap, and the rulers were unprepared to accept that all was not good on the economic front. The manipulated indicators would not help to have any real economic turnaround in the country. “Just take the bond offering that did not receive a good response and who is to be blamed for this ill timed venture,” he asked.

Why did the institutional investors not bother to take into account the so-called positive reports of the IMF about the Pakistani economy? Why they avoided to substantially taking part in the latest bond offering is a serious issue that should not go unnoticed?

After the new bond offering, people, even some sitting in the ministry of finance and the central bank, have started saying that borrowing in dollars is no more a feasible option, particularly because of the greenback not being cheap. Currently, Pakistani policy rate is at six percent. This surely demands the rulers and the government’s economic and financial mangers to revisit their strategy to get rid of the expensive foreign loans and rely more on exports and mobilising domestic resources through direct taxes and not through infamous indirect taxes. Broadening the tax net to achieve better tax-to-GDP ratio is inevitable, and curtailing increasing dependence on expensive foreign loans that continue to pile unabated, is must for the revival of the economy. Also, the government needs to implement comprehensive reforms particularly on revenue, energy, and governance sectors.  

Nobody expects the government even its worst critics to come out of the ongoing three years IMF programme. But they do certainly maintain that the Fund officials should gauge the economy through its reviews honestly and prudently, so nobody could allege they are partners in crime. The correct assessment of the economy should lead to improvements in every sector. Perhaps, this has happened for the first time that the international investors did not take into account the positive picture of the Pakistani economy as was painted by the IMF. Serious fiscal ricks posed by the looming energy crisis, coupled with weak taxation system urge the planners to bring the house in order, so as to avoid heavy and expensive foreign loans.

The writer is a senior journalist based in Islamabad