Pakistan has reportedly raised $500 million from the international market at 8.25 percent coupon rate. One of the questions that needs to be answered with clarity is what was the compulsion to borrow at such high cost? Was it meant to prop up the forex reserves when there is so much turbulence and volatility in the market following postponement of an expected raise in the Fed’s policy rate and the recent devaluation of the Chinese currency? Did we go to the market because we had already committed it to the International Monetary Fund (IMF) in terms of level of forex reserves? Was it due to a delay in reimbursement of Coalition Support Fund or else we want to maintain PKR parity with the US dollar at current levels?
One fact is clear that the response was not quite overwhelming. Further, the rate on the secondary market has dropped for 10-year Pak Eurobond by a one percent to 7.25. Even though our credit rating is stable and the outlook has improved as determined by international rating agencies, it increasingly appears that the market is not convinced of the improvement in economic activity in Pakistan. It is generally felt that Pakistan will have to borrow again to pay the yearly interest on existing loans. Why can’t the government pay higher interest on dollar deposits or on dollar purchase of PIBs and T-bills to prop up the forex reserves?
It is well known that there is redemption of 10-year Eurobond, issued in 2006, in March 2016 of 500 million dollars. Perhaps this forced the government to raise an equivalent amount prior to September 30th. But we are glad that the Finance Minister stood firm on the amount instead of raising more money at a higher rate. However, it would have been better to enter the bond market much earlier in 2015 or else wait for volatility to subside.
Obviously, the long-term investor must be very happy at Pakistan’s decision and would remain interested in future deals. However, the market players are not buying the claim of Finance Minister Dar of a ‘remarkable turnaround’. Both the restructuring of the economy in general and the energy sector in particular is yet to show any positive results. Critics would be of the opinion that this was not the right time to enter the market. To them it may appear absurd as there is no desperation to improve the forex reserves (around 19 billion dollars). The financial advisors to the issue might have advised that the dollar rates are likely to be higher once the Fed raises its policy rate from historic low of zero to 0.25 percent and begins to unwind its quantitative easing (QE) ($17 trillion).
One thing, however, is clear that borrowing in dollars is no longer cheap as Pakistan’s policy rate is at six percent at this point in time. However, the government needs to focus on improving the tax-to-GDP ratio as its present taxation policy is not bearing fruits. Taxing all kinds of banking transactions other than cash withdrawals at 0.6 percent is causing a turmoil in domestic banking. Deposits are continuously dropping (Rs 180 billion) at last count and enlargement of withholding taxes is forcing people away from financial inclusion. Broadening of tax base is desirable but higher withholding rates on existing taxpayers are raising the cost of doing business and making the domestic industry uncompetitive. Let us amend the existing laws and have fairness in taxation – both horizontal and vertical. Buoyancy in revenue collection needs to be enhanced for better results and improvement in Pakistan’s ratings.
If the foray into the bond market was meant for the benefit of Finance Minister’s interaction with investors and bankers in New York, this was indeed a costly proposition. Fed is likely to raise its policy rate by 25 basis points anytime soon. The outflow of funds from emerging markets has already resulted in a 250 basis point hike in rates. This is the ground reality that needs to be understood. Policymaking also requires the authorities to take market intelligence into account with a view to taking informed decisions