The federal cabinet is yet to take a decision on a proposal of the Finance Division to raise money from international capital market by issuing Euro bonds and Sukuk. Sources revealed to Business Recorder that a meeting of the federal cabinet on October 11, 2017 deferred the proposal after deliberation. When contacted, sources in the Finance Ministry said the proposal for issuance of bonds is still under process. They added that the market would determine the interest rate, depending on the economic and political situation of the country.

The government is already facing severe criticism from opposition parties and economists for massive borrowing during the last three years, taking the foreign debt to unsustainable levels. An official of Finance Division said that increase in trade deficit and pressure on foreign exchange reserves was behind the plan to go again to the international capital market and issue bonds and sukuk.

The official added the government plans to borrow from the international market before December 2017 and preparations to this effect are under way. He added that an encouraging response from the market would send a positive message to the multilaterals and bilaterals that would be very helpful for future borrowing from them.

Sources on condition of anonymity said the amount would be decided subsequent to response from the international market in the aftermath of the road shows. They added that the government would have to borrow either from the international market through issuance of bonds or from commercial banks to contain the widening financing gap.

Sources further added that Pakistan''s foreign exchange reserves have declined from $16.1 billion in June 30, 2017 to below $13.941 billion on October 20, 2017. The situation, they added, may lead to the market charging a high mark up as Pakistan''s monthly financing gap is expected to increase to $1 billion per month.

The government must take some urgent remedial measures in support of the deteriorating balance of payment position, sources added. Background discussions with officials revealed that there is only one option for the government: to take foreign loans either from the international market or from commercial banks to support the deteriorating foreign exchange reserves. There was a consensus that the response of the international market may be adverse due to political stability issue.

"International market takes account of the stability of the political government that launches Eurobonds/sukuk. In the event that the political risks are deemed to be high, as is clearly the case today in Pakistan, the rate of return on the bonds would have to be well above the market rate to attract any foreign interest," they added.

Copyright Business Recorder, 2017