EDITORIAL: External debt has been piling up since 2008. With stagnant exports and low domestic industrial development, growth has increasingly relied on imports. A persistent huge fiscal deficit stimulated demand that was and is financed by external debt. Simply put, dollar inflows outpaced the outflows. The crisis of low foreign exchange reserves has forced every successive government to incur fresh debt to pay off existing debt and plug the gap created by market based net flows. The stock of debt is growing; and to generate incremental dollars, the cost of market- based debt is increasing. That is precisely why successive governments have strived to generate concessionary funding from multilateral and bilateral agencies. Multilateral debt is cheap; and is usually welcomed by all governments and bilateral debt too, is obtained from friendly countries at concessional rates. Q-Block's focus is tilted towards obtaining debt; and in the process, suboptimal decisions are made. There were few instances in the past where technical assistance programmes by multilaterals failed. In case of bilateral support, there are examples where foreign policy has been influenced by creditor countries.
The third layer of debt is market based. It is issued at a higher rate relative to many other emerging economies. In the last regime, foreign commercial borrowing from international banks took place at 7-8 percent. The issuance of Eurobonds for 5 and 10 years were at similar rates. Recently, carry trade (hot money) also flowed in at peaking domestic interest rates. The government is now trying to attract savings from non-resident Pakistanis and those residents who have declared assets outside Pakistan. Currently, Pakistan is only receiving the benefit of 'home remittances' that flow in to finance consumption (of family and friends) of an estimated 11 million-strong diaspora abroad. Roshan Digital Accounts will offer these expatriates direct access to invest in bond and asset markets in Pakistan. This carrot has been offered in the form of Naya Pakistan Certificate (NPC) which is offering 5.5-7 percent returns on certificates of varying maturity denominated in US dollar. The NPCs are available in Pak Rupee too at higher rates than prevailing government bond rates.
There has been criticism by some on the high rates, questioning why similar or identical terms cannot be offered to all the resident citizenry. It is also being argued that the return offered is much too high, making it an expensive debt that will hit the economy hard at the time of payback. All these points have merit, but they also reflect the dire straits that we are in and our desperation to lure dollars. The rates being offered are for Pakistanis only, irrespective of their status as resident or non-resident. Although for residents, only declared assets outside Pakistan are eligible for investment. The subtle distinction to remember is that primarily the savings of Pakistanis parked (or invested) outside Pakistan are being wooed.
The decision of what rate is being offered cannot be compared to what is being offered to local investors. In Pakistan, controls on foreign capital flows do not adhere to a freely functioning market-based mechanism. Capital cannot move in and out seamlessly. Informal means are also drying out with every passing day. The arbitrage opportunity - borrow US dollars in Pakistan against FE account at 2-3 percent, remit it outwards and bring it back by investing in NPCs at 5.5-7 percent - is only a theoretical possibility. But it is easier said than done in today's world.
These bonds are strictly for capital outside Pakistan. This capital has access to foreign markets. The rates must be comparable to Pakistan's international bonds' secondary market yields. Those bonds are currently trading at 6.6 percent and were at 11 percent in early days of Covid-19 outbreak. Critics argue that the US market yields have fallen to almost zero; but Pakistan is still offering quite high rates. They forget that Pakistani bonds were already trading over 8 percent prior to the pandemic.
Given this context, NPC rates are not high. But there is an important difference. NPC can be encashed anytime without any real penalty. For example, if a three-year certificate (offered at 6.75 percent) is redeemed prematurely in second year, the return would be equivalent to 12-month paper (6.5 percent) for the holding period. Eurobonds can be sold in secondary market, but the risk is borne by the investor. In the case of NPC, there is no risk of early exit. This could be termed a discounted deal being offered to entice a new customer in Pakistan's debt market. This is being offered to expats (mainly) to kick-start a new market. The government reserves the right to change rates any time it so wishes. It should reduce the rates once enough interest is generated in these bonds.
Copyright Business Recorder, 2020
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