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FM “DAR “Should Think Beyond”

November 30, 2014

‘Sukuk five times oversubscribed’

By: ASAD RIZVI (KARACHI)   Published on November 28, 2014
Our Finance Minister Ishaq Dar has once again captured every Pakistani’s attention. However, I do not consider this as another feather in his cap since foreign debt has surged by another billion US dollars at the rate of 6.75 percent in addition to earlier money raised through USD 2 billion Eurobond at an average cost of 7.75 percent.

This may be very pleasing for the IMF, as it gives breathing space to it, because with an additional USD 3 billion borrowed money since April 2014, the IMF money is now protected for a longer period of time and will not be utilised until this borrowed amount of USD 3 billion is spent.

The funds borrowed from the global lender are protected and safely parked with BIS/the World Bank. The sad part is that so far Pakistan has borrowed USD 554 million on four occasions, but cannot use Rupee liquidity that would have helped ease fiscal deficit of Rs 228 billion. So an IMF borrowing is only good for a window dressing purpose. What is more amusing is that based on his calculation Dar claimed that Sukuk borrowing would save the country about Rs 5 billion annually. Dar Sahib, the interest cost of Euro & Sukuk bonds is USD 222 million. Moreover, $1.662 billion borrowed from the IMF at the rate of 2.25 percent would cost another USD 37 million. So the annual cost of fund at current parity in rupee is Rs 27 billion and this borrowing has not been hedged.

Did the government ever think about the cost of government securities? It has flooded the market with government paper; holding is now Rs 5.7 trillion and at the rate of roughly 11 percent with a Rs 627 billion cost and if the government reduces the coupon rate and discount rate by 300 basis points, it would annually reduce its borrowing cost by Rs 171 billion.

When tall claims are made about economic gains then one needs to know about the effective use of yield curve, which is used to predict changes in economic output and growth. With current inflation rate one can safely reduce the discount rate by another 200-250 basis points and 10-year coupon rate by 4 percent to 8 percent.

Copyright Business Recorder, 2014

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