A new medium-term debt management strategy that the Ministry of Finance unveiled this week gives a plan for floating dollar-denominated Eurobonds up to fiscal year 2018-19.
However, the government says it has the flexibility in terms of timing and size of the bonds. It also plans to raise $500 million before June this year.
Since coming to power, the PML-N government has raised $3.5 billion by issuing bonds in international debt markets including $1 billion through the Sukuk (Islamic bonds). In September last year, it raised $500 million through Eurobonds at a very high interest rate of 8.25%.
A recent report of Moody’s Investor Services, an international credit rating agency, said Pakistan’s debt affordability had weakened after it shifted to unconventional loans by floating $3.5 billion worth of international bonds. This increased the country’s borrowing cost, it said.
Last month, the Senate Standing Committee on Finance decided to summon representatives of three international banks that the government hired for offering $500 million worth of Eurobonds after it suspected that the money invested by foreigners had actually flown from Pakistan.
The government insists that the resources mobilised by the bonds were used to retire the expensive domestic debt in the past. It intends to raise $1 billion in 2015-16 and thereafter $500 million each in 2016-17 and 2017-18, according to the debt strategy.
In 2018-19, it plans to issue Eurobonds valuing $2 billion to refinance the maturing bonds.
The 2019 bonds will be issued to retire the same amount of debt that the government contracted after coming to power. Furthermore, $500 million ten-year Eurobonds issued in 2006 are maturing this month. Next year, Eurobonds valuing $750 million, which the Musharraf government floated in 2007 at an interest rate of 6.75%, are coming due for payments.
Inflows, outflows
The Debt Policy Coordination Office that prepared the strategy has estimated that average yearly external inflows would be around $6.5 billion with expected average outflows of $4 billion in the medium term.
The new debt strategy largely focuses on diversification of financing and lengthening the maturity of debt profile. However, it has completely ignored implications of the off-budget fiscal risk for the country’s debt projections.
In coming years, huge sums of external inflows would be off the budget as part of the government’s strategy to show the external public debt at lower levels.
A recent report of the International Monetary Fund (IMF) has given broader pillars for strengthening the debt and public finance management to reduce fiscal risks.
“A debt management strategy based on building funding buffers, assessing off-budget fiscal risks, diversifying financing from both domestic and external sources and lengthening the maturity profile of domestic debt will help mitigate these risks,” said the IMF.
Projections vary
The debt strategy has used ambitious macroeconomic projections for its calculations, unlike the IMF that is taking a conservative approach. The government has projected that the economy will grow at a pace of 6.5% in 2016-17 while the IMF puts the expansion at 4.7%.
Similarly, for 2017-18 the government expects a 7% growth against IMF’s estimate of only 5%. These projections have implications for the country’s debt sustainability.
Likewise, the IMF and government’s estimates of budget deficit over the medium term also vary. The latter has also given an optimistic outlook on the trade balance.
A glaring difference in projections is in the current account deficit. The debt strategy shows the deficit at less than 1% of gross domestic product in the next three years, which is up to two times lower than the IMF’s projection.
