Contrary to the advice of addressing structural problems in the external sector, the government continues to plan for additional borrowings to finance the external sector deficit in order to maintain foreign exchange reserves at a reasonable level. According to the latest reports, Pakistan has finalised two consortia of financial advisers to float dollar-denominated Euro and Sukuk bonds to raise around dollar 2 billion. Citibank, Deutsche Bank, Standard Chartered Bank and Industrial and Commercial Bank of China (ICBC) will be mandated to arrange the Eurobond transaction while Sukuk bond consortium will consist of Citibank, Deutsche Bank, Standard Chartered Bank, ICBC, Dubai Islamic Bank (DIB) and Noor Bank JSPC. The government will pitch dollar 500 million but would try to raise over one billion from each bond. The M3 Motorway (Pindi Bhattian-Faisalabad) would be pledged in collateral to raise loans through the Sukuk bonds. DIB and ICBC were reported to have given the lowest financial bids, quoting 1.5 percent less fee than offered by three European banks and the Finance Secretary had asked the three banks to match the fee if they wanted to be a part of the consortium. The Finance Ministry is reported to be targeting November 15, 2017 to conclude the transactions.

The two bonds expected to yield between dollar 2-3 billion are of course aimed at taking pressure off the balance of payments and maintaining a satisfactory FX reserve position. The country's external sector position has weakened significantly in the recent past as the current account deficit stood at around dollar 12 billion during 2016-17 and swelled to dollar 3.6 billion in the first quarter of FY18 which was higher by 117 percent than the corresponding period of last year. Consequently, foreign exchange reserves of the country are constantly under pressure and have declined by over dollar 2 billion in the past three months to stand at dollar 14.2 billion as of October 13, 2017. In a situation like this, the government should have made all-out efforts to expand exports, contain imports and revert to a sustainable position in the external sector but the authorities, instead of taking the needed measures like depreciation of the rupee and enhancing the exportable surpluses of the economy, has found an easy way out to tackle this unfavourable development by borrowing short-term from abroad or through Eurobonds or Sukuks to tide over the situation. This preferred choice of the Finance Ministry has led to borrowings of dollar 10.8 billion by floatation of bonds since 2014 which is a huge amount. The raising of this amount was not a big deal due to ample availability of liquidity in the international market and rating of Pakistan at B by Standard and Poor's, B3 by Moody's and B by Fitch. It needs to be remembered, however, that the rate of return to be offered on bonds could be higher this time due to the fluid political situation in the country and the authorities' desperation to raise loans to protect the official foreign currency reserves. In September, 2015, the government had issued Eurobonds amounting to dollar 500 million with a 10-year maturity in the international market at an interest rate of 8.25 percent which was 6.12 percent above the US treasury rate. The Senate Standing Committee on Finance is still investigating this issue by determining whether the money invested in these dollar-denominated bonds had actually flown from Pakistan or came from abroad. Hopefully, no such irregularity would be allowed to happen this time but the real question to be asked is how long Pakistan, instead of correcting the external sector situation, would continue to resort to this mode of financial accommodation and that too in foreign exchange just to show to the people of the country that Pakistan has comfortable level of FX reserves at its disposal. Needless to mention that the high cost borrowings raised through Eurobonds and Sukuks would be deposited by the State Bank largely in overseas commercial banks at lower rates available in the market and difference in the two rates would be the extent of loss arising from this poor strategy.

Copyright Business Recorder, 2017