Pakistan recently issued a $500 million Eurobond at a mouth-watering 8.25%. If there were any question marks on whether Pakistan could have issued this bond at better cost, look no further than where it is trading right now in the market – 7.40%. Why did then Pakistan have to issue this expensive bond? Many anchors (sadly), economists and ministry officials tried their hand at explaining the largess. Perhaps the best explanation came from the ministry itself when they issued a Eurobond analysis on their website. I present below the pertinent paragraph:
‘In the most recent auction of Pakistan Investment Bonds (PIBs), the 10-year PIB was sold at an average cut-off yield of 9.33%. Thus a bond cost of 8.25% is significantly better – by 108 BPS – from that of the PIBs. The proceeds of bonds will go in reducing domestic borrowings and would not lead to increased expenditures. This will reduce the debt servicing cost in the national budget.’
The above explanation is either gross incompetence on the behalf of the ministry or an attempt at cheating the public (Let’s hope it’s the later because nothing could be worse than incompetence in the ministry that manages our country’s finances). The statement assumes that for each of the next ten years the Pakistan rupee would not depreciate by more than 1% against the US dollar. Given the current economic fundamentals of the two countries, this is highly unlikely, perhaps impossible. Interestingly, the rupee has already depreciated by nearly 1% since the Eurobond was offered. Just to cement this argument further, the Pakistan rupee has depreciated by over 6% a year over the last ten years (2005-2015). The rupee depreciated by over 9% a year (on average) in the previous ten years (1995-2005).
The current government’s penchant for high-cost borrowing is even more evident in the domestic market. In the years 2013 and 2014, the Pakistan government issued its benchmark domestic 3-year, 5-year and 10-year bonds at one of the highest spreads over the discount rate (interest rate). The 10-year bond, whose historical spread over the discount rate has been less than 1.5%, was offered at a whopping spread of 3.30%. This is billions of rupees of additional cost for the government.
It will take more than an article to delve into why the current government loves its expensive loans. But one reason that stands out is the absence of expertise within the ministry of finance. It is, perhaps, too much to ask of a career diplomat to know the nitty gritties of the financial world. This is precisely why the government must utilise the expertise of the private sector. Equally, it is important that the media and the economic commentators call out the government if it issues its debt at an exorbitant cost. Talking about yield spreads and average depreciation might not bring in the highest TV ratings, but it will shed much needed light on the country’s biggest expense – interest payments.
ALIYA GARDEZI
Lahore
