Pakistan has returned to the international capital market with a bang. Set to initially raise dollar 500 million in the international market through the floatation of Eurobonds which was later raised to dollar 2.0 billion, the amount subscribed was almost three times over, indicating a tremendous confidence in the country's future. Overjoyed by the market's amazing interest in Pakistan's Eurobonds, Finance Minister Ishaq Dar while addressing a US. Think-Tank in Washington said that demonstration of massive response to Pakistani sovereign paper was unprecedented and was due to marked improvement in economic indicators of the country brought about by the introduction of critical economic reforms at the cost of political popularity. A spokesman for the Ministry of Finance stated that Pakistan had made a historic return to the international bond market after a period of seven years with dual offering aggregating dollar 2.0 billion, raising dollar 1.0 billion each in 5 and 10 years tenors respectively and the transaction represented the largest-ever bond issue by Pakistan. Encouragingly, the response was from high quality investors and also distributed across all major geographic regions. Five-year bonds were subscribed to the extent of 59 percent in the US, 19 percent in the UK, 10 percent in other countries of Europe, 10 percent in Asia and 2 percent from the rest of the world. In this category, 84 percent of the bonds were taken by fund managers, 8 percent by banks, 7 percent by hedge funds and one percent by insurance companies and pension funds. Similar trends were witnessed in the case of 10-year bonds, with most of the money coming from the US and contributed by fund managers.
The fact that investors' response to the bond issue was overwhelmingly strong and Pakistan was able to capitalise on its improving external financing position and re-establish itself in the international debt capital market after an absence of over 7 years. This reflects the growing confidence of investors in the country's economy, particularly the government's avowed resolve to undertake painful structural reforms. The effort was helped by extensive global road shows, with two teams covering key financial centres and informing prospective investors about the recent trends in Pakistan's economy, reserve position, government's reform agenda and its key priorities. No less important was the on-going EFF programme with the IMF which provided the seal of approval for the continuity of the reform process besides disbursing foreign exchange reserves under various tranches. The IMF, as is well known, disburses the amount under the arrangement after confirming that the country has fulfilled the necessary conditions and is firmly on track. The successful floatation of Eurobonds would boost foreign exchange reserves of the country and go a long way in ensuring solvency of the economy. It could also re-establish country's profile for global fixed income investors and lead to a beginning of foreign investment in substantial amounts. The launch of Eurobond would also improve the country's image abroad and put the country on the radar of global market players once again. Besides, the deal could enable Pakistan to get a better response in the upcoming telecom license sale, privatisation of SOEs and support the local currency. The growing international confidence in Pakistan's policies and potential would definitely help sustain growth momentum in the years to come.
It needs to be highlighted, however, that resources borrowed through the floatation of Eurobonds have been obtained at a great cost and could only be useful to the country if these are used productively and in an optimum fashion. One billion dollars raised for a 5-year tenor have a fixed rate of 7.25 percent, 5.58 percent over and above the benchmark five-year rate for US Treasury rate while 1 billion dollars generated through 10-year bonds carry a fixed rate of 8.25 percent or 5.56 percent higher than the corresponding 10-year US Treasury benchmark rate. Obviously, foreign investors (Mutual Funds comprising pension and hedge funds) preferred to deploy their funds in Pak sovereign Eurobonds for earning much higher rates of return than anything else. In other words, the country has got a very expensive loan which has to be repaid with high interest and would continue to be a burden on the external sector accounts in future. Another worry is that when such a loan has been received and foreign exchange reserves of the country boosted, economic managers of the country may become complacent and believe that now all is well on the economic front. It is not. On the average the rupee depreciates by seven percent in a year. The payback is in rupee terms would be 15 percent a year. However, without this a benchmark in international markets - big ticket FDI is not possible. Such a belief could be dangerous for the continuity of reforms and long-term prospects of the economy. Future generations must not be burdened with cumbersome repayment obligations unless it is absolutely necessary. Path of reforms is painful, requiring the nation to demonstrate perseverance and steadfastness.
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