A Business Recorder exclusive, sourced to Miftah Ismail, the Advisor to the Prime Minister for Finance, Revenue and Economic Affairs, on Wednesday said the Ministry of Finance withdrew the summary of issuance of 1 billion dollar Eurobonds for cabinet approval at the last minute – a withdrawal that is generating considerable speculation in economic and political circles. The summary had noted that ‘tapping’ would be the way forward, defined as not higher than the original issue amount which in this case was 1.5 billion dollars, at a coupon rate of 6.875 for a period of 10 years and quoted Ismail as saying that “I have withdrawn the summary…we are not going for tapping.”
Pakistan raised 1 billion dollars in a five-year Sukuk (at a rate of 5.625 percent per annum) and 1.5 billion in 10-year Eurobond transactions end-November 2017 (at a rate of 6.875 percent per annum). The Ministry further claimed that the order book for Pakistan’s sovereign papers was over 8 billion dollars but Pakistan picked up only 2.5 billion dollars in order to ensure low final yields on Sukuks and Eurobonds. The question arises as to why a decrease in the amount of issuance would impact on the yield as sovereign issues are guided by the state of the economy rather than supply given that demand was claimed to be over 8 billion dollars. Be that as it may, the Ministry’s contention probably prompted the proposal to go for tapping.
The reason for the withdrawal of the summary, economists further speculate, maybe because the rate of return on the Eurobonds as noted in the summary is indicative of market conditions end-November and does not reflect market conditions today. This view is strengthened by the fact that Fitch on 25 January 2018 downgraded Pakistan’s outlook from stable to negative and reaffirmed the ‘B’ credit rating, citing a fall in foreign exchange reserves and widening fiscal deficit as major indicators of reversals subsequent to the end of the three-year International Monetary Fund’s Extended Fund Facility in September 2016. Fitch further attributed political uncertainty and the coming elections as factors that contributed to the downgrade in rating.
Economists further speculate that the reason for the withdrawal of the summary could be the realization on the part of the Ministry of Finance that the cost of Eurobonds would be prohibitively high with declining foreign exchange earnings from desired sources notably exports (declining due to failure to release refunds as well as higher input costs relative to international competitors) and remittances (declining worldwide due to a recession in the Arab world) while imports continue to rise unchecked (with many attributing it to massive machinery imports from China under the China Pakistan Economic Corridor as well as relatively overvalued rupee in spite of a depreciation in December). The rising current account deficit coupled with the fact that the government, no doubt cognizant of a significant rise in debt equity during the past four and half years of its tenure, its contribution to total external borrowing and annual debt servicing, thereby widening the budget deficit may have thought it advisable to look at other alternative sources of borrowing, less subject to public criticism. Borrowing from the State Bank as well as borrowing from the commercial banking sector abroad (already 7 billion dollars have been borrowed from this expensive source with a small amortization period) may therefore be preferred at this stage.
This newspaper would propose to the government to reduce its reliance on borrowing, try to keep within the already generous budgetary limit set on debt, by curtailing current and development expenditure (unlikely during an election year) and seek to raise revenue not through amnesty schemes (the government is reportedly considering two additional schemes – over and above the 3 that have already failed during its tenure) but through meaningful tax reforms that widens the net instead of taxing the already taxed.
