Return to bonds

The News, Friday, April 11, 2014

From Print Edition






Pakistans return to the international bond market after seven years is being painted by the government
as a roaring success. To some extent, that description holds true. The IMF has set Pakistan a target of
reaching at least $9 billion in official foreign exchange reserves by the end of the financial year and so
being able to raise $2 billion in bonds will help us come closer to that magic number. In addition,
Finance Minister Ishaq Dar has said that the auction of 3G/4G licences will be held by April 23, which the
government is hoping will fetch the country up to $2 billion more. The effect of holding greater foreign
currency reserves will be generally positive. It will help further strengthen our currency, which in turn
will make imports cheaper. Since Pakistans main import oil will become more affordable that will
not only reduce our balance of payments deficit but could also help control the rampant inflation in the
country. That we were able to raise this money through the issue of bonds, and that too by exceeding
the governments initial expectation of raising $500 million, is a sign that the international community
approves of the PML-Ns stewardship of the economy.

But that approval has its limits. Stuck with a weak economy, unmanageable debt and the constant
spectre of terrorism, Pakistan has had to offer much higher rates of interest on its bonds. The country
issued both five and ten-year bonds, offering a fixed rate of interest of 7.25 percent and 8.25 percent on
them, respectively. This is about 5.5 percent higher than the interest paid on US bonds and even one
percent higher than the interest paid on bonds the last time we issued them. Should our economy not
grow at expected rates, the government could end up costing itself a lot of money in the long run.
Defaulting on the bonds cannot be an option since that would destroy any credibility we have and lead
to a complete shutdown of loans from international financial institutions. Pakistan may also not be able
to reach the IMF target for maintaining foreign exchange reserves of $9 billion. The countrys current
reserves stand at just over $5 billion, so after taking the large import bill into account, it may need
further loans to reach the target. The hope is that this successful bond issue will convince the World
Bank and the Asian Development Bank to make up the shortfall. Now we just have to hope that we
havent been short-sighted in offering high-priced bonds that we may find difficult to repay on maturity.