Pakistan to float $1.5b Eurobonds

Move comes after inflow of hot foreign money proved costly

Shahbaz Rana May 29, 2020

ISLAMABAD: Pakistan has planned to raise $1.5 billion by floating Eurobonds in the next fiscal year after the decision to give preference to hot foreign money over $3 billion worth of bonds in the outgoing fiscal year proved costly.

The $1.5-billion borrowing by floating sovereign bonds is part of fiscal year 2020-21 external inflows that the government will receive to meet external debt obligations and build foreign exchange reserves, highly placed sources in the Ministry of Finance told The Express Tribune.

The plan had also been shared with Prime Minister Imran Khan before Eidul Fitr, said the sources.

In budget estimates, the government had also planned to raise $3 billion by floating sovereign bonds in fiscal year 2019-20, ending June 30. But it dropped the plan to raise money from international capital markets after the process of hiring financial advisers to do the job.

The central bank and the Ministry of Finance were of the opinion that the issuance of Eurobonds in the current fiscal year may discourage hot foreign money inflows, the sources said. A top government functionary, who remained part of deliberations, said on condition of anonymity that both the government and the SBP management concluded that some of the funds and institutions that were investing in government securities would also invest in Eurobonds, therefore, it would be prudent to drop the bond float plan.

The money raised through sovereign bonds is payable either in five, seven or 10 years and the government’s decision to give preference to hot foreign money that hardly stayed for three months in most cases raises transparency questions.

“When relatively cheaper longer-term money in the shape of Eurobonds was available, which was neither volatile nor threatening foreign exchange stability, why the government did not avail it,” asked Dr Zubair Khan, former minister for commerce. “Apparently, it was financial wrongdoing and the government should order a forensic audit of the hot foreign money inflows,” he said.

The Express Tribune sent a set of questions to the Ministry of Finance last Saturday but it did not respond till the filing of the story.

The finance ministry had been requested to comment whether it was correct that the decision to postpone the Eurobonds, which was originally scheduled for November 2019, was taken due to the SBP’s preference for hot foreign money.

The Ministry of Finance also did not answer as to why it halted the process initiated in September last year for hiring financial advisers for the bond float. It failed to respond whether the bond issue was cancelled on the assumption that it would cannibalise the hot foreign money.

In October last year, top European, American and Chinese banks submitted bids for being hired as financial advisers to float the sovereign bonds. For raising $2 billion through Euro and Sukuk bonds for easing the balance of payments position, November 15, 2019 had been set as the date to close these transactions.

Then in February this year, the Ministry of Finance told The Express Tribune, “Due to availability of low-cost external inflows from multilateral and bilateral sources, the government decided to offer Eurobonds later in the financial year.”

However, due to the situation arising in the wake of the Covid-19 spread that rattled global markets and also hit Pakistan’s macroeconomic indicators, it was found unfeasible to float the bonds in such critical times.

Hot foreign money pattern

Sources said the Ministry of Finance and the SBP management had started holding meetings with foreign investors during their visits to the United States aimed at convincing them to invest in government securities.

Three key factors played the role in getting the hot foreign money - a very lucrative rate of return that the central bank set by keeping interest rate high at 13.25% till March 17, a stable exchange rate and very low tax obligations with no requirement to file annual income tax returns, said the sources who remained involved in the process. After Pakistan delivered on all these three parameters, the foreign investors started investing in the country. In November last year when Pakistan had a plan to issue up to $2 billion worth of Eurobonds, it received $713.2 million in hot foreign money, showed the central bank data.

The country received $819 million in the next three months but by this time the outflows had begun due to the overall panic caused by the Covid-19 outbreak that shook global markets and sparked a phased reduction in interest rate by the central bank to support Pakistan’s economy.

The SBP data showed that in February the foreign investors withdrew $263 million and they pulled out another $1.8 billion in March and $571 million in April.

As against cumulative inflow of $3.64 billion into government securities, the foreign investors withdrew $3.03 billion by May 20 this year, leaving Pakistan with only $610 million. Most of the hot foreign money flew back when the exchange rate was either stable at Rs154.5 to a dollar or started depreciating towards Rs159.1. A lower value of the rupee against the greenback causes more losses to the foreign investors.

In order to fill the gap due to the hot foreign money outflow, Pakistan had to secure a $1.4-billion emergency loan from the International Monetary Fund (IMF) in April that helped keep official foreign currency reserves at around $12 billion.

The SBP governor has a couple of times said that Pakistan is a free economy and it cannot stop anybody to invest in government securities.

The Express Tribune sent four questions to SBP Chief Spokesman Abid Qamar on April 23 and waited for his response for five weeks. He did not respond to the questions despite repeated requests. He was requested to comment whether the SBP governor met with people from BlackRock Investment, JP Morgan and Citibank during his overseas trips between August and December 2019.

The SBP spokesman also did not share details of investments made by BlackRock, JP Morgan and Citibank out of the total $3.6 billion investment in debt securities.

Published in The Express Tribune, May 29th, 2020.

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