Dollar bonds: race against time
PM Abbasi looked in a hurry last week unveiling tax amnesty. Short of time, the premier may best be remembered for his introduction of massive tax-cuts for the salaried class. After all, he had named tax-cuts among his priorities in his inaugural speech. But can the “radical economic reforms package” deliver where economy needs it the most, by on-shoring (cheap) dollars to ease balance of payment pressure?
Based on the presidential ordinances promulgated last Sunday that gave legal cover to the amnesty scheme, the government is planning to launch five-year dollar-denominated bonds. These securities will come with biannual rupee-denominated profit payments of 3 percent per annum, with a PKR encashment at maturity at the prevailing rupee-dollar rate. The State Bank of Pakistan will administer the scheme, which is expected to run from April 10, 2018 to June 30, 2018.
By paying a 2 percent penalty, Pakistani citizens with offshore liquid assets can choose to participate in this scheme. The incentive to repatriate seems twofold. One, the dollar bond’s rate of return is attractive compared to really low interest rates in the West. And two, amid increasing scrutiny over source of funds in the host countries, it makes sense for expats to legitimize undeclared earnings by coming clean back home. Mere declaration of liquid foreign assets will carry a 5 percent penalty.
The scheme also applies to undeclared forex held up in foreign currency accounts within Pakistan. The law’s language suggests that owners of such accounts either buy those bonds after paying a 2 percent penalty on declaration or simply get their dollars en-cashed into rupee after paying a 2 percent penalty. It isn’t clear at this stage whether forex stashed at places like homes and lockers can also be regularized.
The government needs in excess of $6 billion in the remainder of this fiscal to finance current account deficit and make loan repayments. The response to the proposed dollar bond needs to be strong enough to help plug some of the forex gap until June. Recall, that National Savings, an attached department of the finance ministry, is also aiming to launch dollar-denominated savings scheme with the name “Overseas Pakistanis Savings Certificate” next month.
(For more on Pakistan’s forex needs, read “Forex: what might have been,” published April 3, 2018)
The poor history of regional amnesty schemes leading to significant forex repatriation dampens any optimism that such dollar bonds will fill up local coffers. Besides, profit and maturity payments in PKR may dissuade potential offshore participants from purchasing the bonds. To regularize their wealth overseas, they may find the 5 percent penalty on mere declaration of liquid foreign assets more acceptable.
Locally, through the bond scheme, the government is apparently hoping to tap into the commercial banks’ FE25 resident deposits. Those deposits totaled $6.94 billion as of February 2018. If some of those dollars ended up with the government, it would boost central bank’s falling net forex reserves, which stood at $11.6 billion on March 30, 2018. This will help beef up the import cover.
But there, too, the optimism may be overstated. Yes, the amnesty package may make it difficult for accountholders with undeclared forex earnings to operate those accounts. But will that difficulty be enough to force those people to go back to PKR, instead of having the unintended effect of taking their dollars out of the system? Also note, the new requirement that only tax-filers can open foreign currency accounts may dissuade more folks from bringing their dollars into the banking system.
