Despite the chaos in Pakistan over the last month with respect to the sit-in outside parliament, the country has managed to successfully raise $2.5 billion from a bond issue in New York. The finance ministry can claim further victory over the fact that the bond issue was completed at the lowest interests offered by Pakistan yet. The country managed to raise $1 billion through five-year Sukuk bonds at 5.625 percent interest and $1.5 billion at 6.875 percent interest through ten-year Eurobonds. While the story is one of success, there is another side to it as well. The finance ministry has continued to offer denials of the vulnerability of Pakistan’s foreign exchange reserves. This has gone against the analysis offered by most observers, including the World Bank. The ministry offered a stern rejection of the WB’s declaration that Pakistan could need a bailout package at the end of the fiscal year. The issue of the bonds seems like a confirmation of the story that the ministry has been trying to dispel. There is a fiscal crisis in Pakistan. While it is better to issue fully paid up bonds instead of taking another IMF bailout, given that the bailouts compromise fiscal sovereignty, the bonds still represent an increase in sovereign debt. This debt eventually has to be paid up. Whether the $2.5 billion bond issue is sufficient to cover the country’s medium-term foreign exchange reserves crisis remains to be seen. The most likely answer is no. The gap between imports and exports has been growing manifold each year and there is no disguising the need for serious action on that front. This reads like a story of economic mismanagement, which is being tapered over by bandages. The other big question with respect to bonds is whether influential Pakistanis looking to stash offshore wealth and take benefit of the high interest rates will actually buy them, or buy what can be called genuine investors. In this sense, an audit of the bond issue could be done. While Pakistanis were directly banned from the process, the possibility of the use of offshore accounts to buy up the bonds cannot be discounted. With the current account deficit swelling to $12.4 billion this year, the overall situation is alarming. The country’s foreign currency reserves are still at a relatively healthy $19.7 billion but it does not take long for such a situation to worsen. The bond issue is a measure taken at the right time and should offer some more breathing room for correcting what is actually going wrong.
