Pakistan’s eurobond success: when will we hear the truth?

A long term liability for a short term solution

The government has been exploring possibilities of financing its deficit from multiple sources namely, IMF, World Bank, domestic borrowing and now it has found the easiest, yet extremely expensive, solution of all, eurobonds.

Government spokesmen and talk show hosts will visit different socio political aspects, run endless shows on not so trivial issues, yet very little is said or raised regarding Pakistan’s seriously vulnerable economy. The present government’s economic advisors are investing their time and energy in actually borrowing and building up reserves rather than taking the bull by the horn. This government, like its predecessors, instead builds a smoke screen around short term economic gimmicks such as current rate of dollar, buildup of foreign reserves by deferring foreign payments, stock market ascend, etc, while discretely evading key question surrounding economic policies; let us briefly examine a few.

Currently, Pakistan’s taxation system is marred with political influence. The current administration has been issuing numerous SROs which, as per sources, favour a few industrial giants at the expense of the common public. The net result is that as taxes fall the deficit is filled from unprecedented borrowing, and increasing tariff rates of electricity, gas and other indirect taxes. Pakistan’s energy deficit is directly affecting the poor and the circular debt is also something which directly the government owes to the people. If this did not raise alarm bells, the circular debt is also a debt which the government owes. In short it then borrows more, or supports inflation to pay the circular debt. This debt is then paid back by squeezing the common man through tariff increase, or sales tax while it is letting bigger “power brokers” off the hook. The fiscal deficit is increasing thanks to weak management, and extravagant government spending. Do we really need motorways, metros, guineas book world record, danish school schemes, sasti rooti, world tours, watan card, Benazir income support scheme, etc, while our basic common economic policies are in disorder?

Currently, Pakistan’s taxation system is marred with political influence. The current administration has been issuing numerous SROs which, as per sources, favour a few industrial giants at the expense of the common public.

So when most of the policies are going haywire, what is the government doing right? The only thing it is doing heavily is borrowing and that too from expensive sources. Budgetary deficits are increasing and are financed from taxes, privatisation receipts, or government borrowings. Let us examine how the three are dealt with by this government. Taxes are being heavily poised in the favour of the rich few, who only recently have enjoyed successive breaks thanks to newly inducted tax break schemes and SROs. Stock markets have been carefully kept out of the main tax net. The agriculture economy is suffering due to inadequate power and energy, and biased policies of the government. So in short, the poor is asked to pay more while the rich get away. That leaves the next big ticket item, privatisation of big enterprises, which will bring one time relief to the government kitty and will eventually be mostly consumed in debt repayments. So how will the government then run itself other than by borrowing heavily?

Eurobonds – when will we tell the people the truth?

Debt is mainly categorised into domestics and external. Domestic debt is the easiest to increase and has been reaching exhaustion levels lately as subsequent governments have reverted it inadvertently for covering up their mismanaged deficits, unnecessary expenditures, and many misadventures. According to political analysts, whether it was PPP, PML-N, or even others, the domestic debt has been “abused” and at times figures have been “managed” to keep people from finding out. For instance, circular debt which the government or its subsidiary PSO owes to the power companies is also a debt however it had been kept under a different heading for some odd reason. The current regime has exhausted the domestic borrowing option or rather stretched it to the limit, hence it needed to find other sources of borrowing. The IMF has been extremely rigid when it comes to general terms and conditions surrounding its loan policy, and the government has struggled to pay its short terms installments. In order to repay IMF and other loans, the government went off shore to borrow in the international open market commonly known as eurobond. The table below reveals a comparative analysis of the Pakistani eurobond.

Table: Recently Launched eurobond in a comparative perspective

Source:- Eurobond advertisement & Fund managers

Let us summarise the above table in a bullet format.

1. It is an expensive option. The Eurobond, which was issued in 2007, was at a much cheaper rate than the 2014 one under the current regime. Interestingly, according to informed sources, the high mark up rate also suggests that someone within the ministry may have “miscalculated” many “other” financial factors and “trapped” the Pakistani government into a high rated long term loan commitment.

2. The interest rate for a much smaller economy, Sri Lanka, is far cheaper. Once again the reason for why our financial managers “locked” the government into such an expensive ordeal is raising questions.

3. The reason why Pakistan’s eurobond was oversubscribed was mainly due to the fact that it was extremely lucrative for some and extremely unfavourably expensive for Pakistan. Simply when Sri Lanka is offering lower rate of five per cent, why did Pakistan offer seven per cent, which makes it 25 per cent more expensive.

The Sri Lankan bond was oversubscribed too. That means if we had decreased our interest rate offer perhaps we would not have had to pay installments at such high rates after all.

4. The Sri Lankan bond was oversubscribed too. That means if we had decreased our interest rate offer perhaps we would not have had to pay installments at such high rates after all.

5. International loans are more expensive than domestic loans. The government is increasing international loans and hence the loan portfolio is tilted towards expensive sources of funds. The implications will be felt in later years.

6. Even if the dollar rate is lower at present, however it is worth mentioning that eurobonds will eventually be paid off in dollars and that too at the then prevailing rate. So the government earns in rupees but pays the loans in dollars and that too at the then prevailing rate. It is anyone’s guess what would be the dollar rate 7-10 years down the road.

So, in a nutshell, the eurobond was taken to partly payoff the previous debts and IMF loans. The bond was overly subscribed because it was expensive and government entered into a long term commitment for shorter term relief, which will not equate well in the coming future. So was it such a big success after all or not? As said above, your guess is as good as mine.