Bond issue and the payback

There is a lot of glee over the overwhelming response to the Eurobond flotation by Pakistan. Offerings were seven times the sought amount for the 10 years sovereign paper. Pakistan's credit rating improved last November/December to a notch below investment grade. As such a lower yield on this sovereign bond was very much on the cards.
The improvement in the rate by 40 basis points (bps), as against a similar issue a year ago by Pakistan, could possibly have been greater had the ongoing judicial crisis not haunted the country. Bond traders must have built in a 20-25 bps 'event risk' premium in their bids. After all the traders are trained to milk the cow to the fullest.
The consistent improvement in debt to GDP ratio, the continuous decline in the fiscal deficit and the overall thrust towards macro-economic stability has indeed attracted the international investor towards Pakistan. The doubling of per capita income to $900 now places Pakistan in a different class. Once our per capita income crosses $1200 or more, Foreign Direct Investment in larger amounts can be expected.
The satisfaction with the bond issue, however, must not make us complacent. We still need to tackle the problems creeping into our public finance structure. At the federal level, the primary surplus balance, seen upto 2003-04, has turned into a deficit. Though on a consolidated basis (federal plus provincial), the budgetary position is still positive, the Federal government is running a revenue deficit, after the increase in provincial allocations, under the prevailing National Finance Commission Award.
This necessitates higher dependency of the federation on the fiscal performance of the provinces. Bridging the revenue gap remains a challenge for the budget makers at present.
So far fiscal consolidation has been at the cost of social expenditure. Much more needs to be done for Pakistan to become a more caring society, where the weaker segments are supported by more welfare measures, so that people can find an exit from poverty. A more coherent development strategy needs to replace the bits and pieces envisaged in the Poverty Alleviation Programme. We need much higher allocations towards health and education sectors, in order the maintain growth in the range of seven to eight percent of the GDP.
The challenge, therefore, is to considerably improve the tax to GDP ratio of 9.5 percent. Pakistan is almost on the bottom rung, on this criterion among developing countries, ie just above Bangladesh at 9.3 percent. Unless we improve the tax to GDP ratio to 15 percent our growth could run into snags and the private sector (domestic or international) will not be a willing partner with the Government in infrastructure projects. After all bond issues are loans and the investors - domestic or foreign - will expect the federal government to have a primary surplus balance in the budget so that the government has the cash to pay back the principal amount with interest in the timeframe committed on the bond issue.
The confidence reposed in our country by savvy investors willing to lend on 10 or 30 years horizon needs to be maintained. Let us avoid fiscal slippage and not get carried away with populist measures in an election year as that would lead to losing the gains achieved at so much pain to the population, during the last seven years. We must not forget market players can be very cruel. Let us also not forget the humiliation faced at the Paris and London Clubs by the present economic team for the follies of its predecessors.