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“Managing Pakistan’s Sovereign Debt”

April 9, 2017

by Asad Rizvi

“Express Tribune” quoting MOF sources reported, Pakistan is likely to borrow USD 750 Million as short-term foreign commercial loan from China due to low cost of borrowing to pay back debt incurred during Musharraf era that matures on May 24 2017. Several Foreign newspapers have also referred “Express Tribune” story.

Before discussing I would like to add that National Economic Priority was and will always be my priority. To improve overall economic performance, sole purpose of my discussion in print/electronic media is to stimulate constructive dialogue and highlight major financial issues to counter misleading data/information.

About 10-years ago, I was anchoring business talk shows on AAj Tv Channel and on several occasions I have discussed matters pertaining to Fiscal (Budget & Tax) and all Monetary issues at length. I had the opportunity to talk to people at all levels.

External Debt was always in my agenda of discussion and I would frequently ask the Finance Minister, representatives of Ministry of Finance and reputed Economist about Pakistan’s repayment plan and its future strategy to pay back the loans.

On my query I was often given lengthy lectures and sermons by the policy makers insisting that my question is not relevant and is not in National interest, hence, I should void negative talk.

Interestingly today, majority of the critics of yesteryear’s are no other than those that have either actively participated in past or were keen supporter of foreign borrowings.

Half of them are still enjoying good relations with the current policy makers and the remaining half are either irritated or frustrated lot for reasons best known to them.

Back on the subject, for reader’s interest, I would like to remind that after a pause of five years, in February 2004 Pakistan issued $ 500 Million 5-year Euro-Bond. In January 2005 Pakistan issued $ 600 Million 5-year Islamic Bond (Sukuk). On March 23, 2006 Pakistan issued $ 500 Million 10-year and $ 300 Million 30-year bond.

In 2006, Pakistan’s external debt was around $ 35.26 Billion, which is currently $ 74.6 Billion. Exports in 2006 were USD 18.2 and then despite Oil prices hovering around USD 75 Billion, imports bill was around USD 28 Billion.

While, lately by the end of FY 2016 Exports were mere USD 20.8. Despite USD 6-7 Billion saving/reduction in oil import bill due to sharp slide in global oil prices that averaged USD around USD 48 per barrel against, import bill amount was at alarmingly high level hitting USD 44.76 Billion marks.

Pakistani analyst/economist/columnist blaming fall in remittance as one of the factor of economic remedy caused by lower global oil prices, which is expected to drop by 2 % or roughly by $200-300 Million in the fiscal year is still likely to average around USD 19 Billion. Putting responsibility on falling remittance is nothing more than joke and sheer excuse by the critics to cover its failed policies. This is a minor cause of widening of Pakistan’s current account deficit that surged to $ 4.716 billion in 7-months (July-January).

Instead, planners should take nation into confidence and tell them about their strategies/plan that how they are handling the situation with the GCC countries, which is faced with uphill task as estimated amount of combined deficit of six-GCC states is USD 153 Billion.

Similarly, exporters are demanding depreciation of Rupee. According to decade old exchange rate trend, during this period against US Dollar, Indian Rupee lost 59 pct of its value, Japanese Yen eased by 11 pct, EURO dipped by 22 pct, Brazilian Real fell by 38 pct and Pak Rupee despite being worst performer that weakened by 75 pct failed to deliver.

Despite the luxury of depreciation at the cost of nation, export performance remained pathetic pushing prices of daily need items exorbitantly high causing sharp surge in inflation rate and making life of majority of the Pakistani’s miserable. It propelled interest rate to extraordinary heights that have ultimately pushed external debt to new highs of USD 74.6 Billion.

Here ‘s the Real Deal

Decade old falling growth trend in exports is shameful and disturbing too. It is due to fundamental weakness in overall economic policy, as tilt is one-sided towards external borrowings, only to finance loans.

Let me ask that what and how much concessions/subsidies are required to end or reduce ongoing economic woes to half the size? But, then all the beneficiaries should simultaneously give a number in writing that many jobs will be created? By how much of exports will surge and when and what will be the increase revenue collection amount?

First of all lets accept that we cannot meet and fulfill sizable order requirements, as the country produces nothing in bulk. Secondly country’s production is outdated and hence, output is low, limited storage facilities to park excess commodity/goods is also a discouraging factor. Thirdly good part of our product (food commodity) often does not meet the required global standard (quarantine) to cater demand and lastly unfortunately due to obsolete technology we cannot provide finished goods to meet international orders or buyers demand, as the economy is mostly dependent on export of raw material.

Further, due to sizable inflated growth of Domestic Market during last decade or so, which is not real in economic term, as the growth is largely caused by inflation, resulting extreme shortage of cash flow of both (Foreign Currency and Pak Rupee).

There could be lot of talk of higher economic growth, but except for agriculture and food all growth related to energy sector, vehicles, cement and telecom industry are largely import dependent.

Except for labor nothing is local and for business activity in the country, it is solely dependent on imports to meet local demand, which eating up foreign exchange. Repatriation of profit and interest payment on foreign borrowings is another big ticket item that swallows nearly USD 6 Billion annually.

Surprisingly no one is pointing this unusual growth pattern in import. Despite sharp fall in oil prices that has eased oil bill by nearly USD 6-7 Billion annually, pressure continues to mounting and is widening the trade gap.

The pressure is added as respective governments failing to impose tax on all types of income and to fill gaps is forced to impose indirect taxes to get closer to the Revenue target. Cash squeeze also inflates rising circular debt that has surged to around Rs 370 Billion. Cash shortfall over the years has pushed Domestic Debt to Rs 14.83 Trillion.

Central Bank is constantly struggling with cash flow, as it is forced to lend excess money to banks to meet liquidity shortage, which has currently risen to Rs 1.1 Trillion after December 2, 2016 low of Rs 670.8 Billion injection through its Open Market Operations (OMO) window. SBP is repeatedly funding market from its International Reserves/ Foreign Currency Liquidity and has so far utilized USD 3.6 Billion for external funding. According to SBP available data its swap book has also helped to generate Rs 377 for domestic market.

Every Governments Claim/Strategy

Past & Present government’s decade old external borrowing strategy is to float Bond or Sukuk after criticizing previous rulers. They all come up with a standardize statement boasting of impressive pricing structure, issues are always highly oversubscribed getting bigger orders than the previous ones, claiming investors high level of confidence in their economic policy, Investors that meet on the road shows often immediately place orders. On most occasions the offering is very well balanced with increased participation from Europe and USA and it goes on.

The nation is least interested in Bond/Sukuk auction and bidder’s interest and  keener to know that if the economy is robust then why External Debt continues to rise sharply at a faster pace. If the picture of economy is painted rosy, then why is the borrowing so costly and how does it help to stimulate economy? In last 10-years, despite aggressive borrowing strategy by respective governments, if the economy has rallied exceptionally then why eternal debt have doubled from USD 35.26 Billion to USD 74.6 Billion and the debt could not reduced to USD 15 Billion?

Risk of Short Term Borrowings to Meet Long Term Needs

In my November 12, 2016 note about IMF MD Christine Lagarde’s visit to Pakistan, I wrote that she surely has a purpose for large number of waivers. I clearly stated that IMF kindness has reasoning for easing conditions as creation of Asia Infrastructure Investment Bank (AIIB) and China after its CPEC partnership with Pakistan is a big threat for the donor agencies as it could be another big lending source for Pakistan.

Pakistan could now be looking towards China for short term funding to meet its long term commitment, which could be the beginning of new era of large size borrowing.

Sole purpose of short term borrowing is to reduce the cost of borrowing, to avoid high risk premium charged on long term debt. Another risk on exposed position during crisis period is that premium increases sharply and maturity mismatches could become a very expensive proposition.

Therefore, borrowing in short-term against long term commitment is technically risky proposal, as maturity gap remains exposed. In an increasing interest rate environment due to Interest Rate Exposure losses can be incurred due to adverse changes in US Interest Rate. Long term borrowing also reduces/minimize liquidity risk factor.

The idea behind short term borrowing in a rising interest trend clearly depicts that as the country is nearing election, government is playing safe as short term mismatch borrowing will firstly reduce funding cost and if present government fails to get elected the burden will fall on newly elected government.

Ideally, government can still make big headline by demanding from SBP to reduce its Target Rate and simultaneously MOF can sharply cut PIB Coupon Rate in line with inflation rate, which is unlikely to surpass 4.5 pct by end of fiscal year end. Based on calculation governments burden will be eased by nearly Rs 150-200 Billion annually. This is what is practiced around the globe to reduce its borrowing cost.

Tribune Story


(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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