Pakistan receives $1b in Eurobond proceeds

Foreign currency reserves soar to four and a half year high of $18.2b

KARACHI:

Pakistan has received $1 billion raised by floating Eurobond in the international market last week, boosting the country’s foreign currency reserves to four and a half year high of $18.2 billion and supporting the rupee to stay stable against the US dollar and other major currencies.

“State Bank of Pakistan (SBP) has received $1 billion proceeds of the government’s tap offering of its recently issued Eurobond. Accordingly, SBP’s FX reserves as on July 13, 2021 reached $18.2 billion, which is the highest level since January 2017,” the central bank said on its official Twitter handle on Wednesday.

About a week ago, the government floated five, 10 and 30-year bonds at interest rates ranging from 5.875-8.45%.

Data breakdown suggested that the country borrowed $300 million for five years with a return of 5.875%, $400 million for 10 years at 7.125% and $300 million for 30 years at 8.45%.

It was the second major borrowing by Pakistan from international investors in recent months. Earlier, it raised $2.5 billion from the sale of Eurobond in the international market about three months ago.

Pakistan has planned to take nearly $16 billion in gross foreign loans in current fiscal year 2021-22 to repay old foreign debt and partially bridge its budget deficit.

Earlier, a central bank official said that net international borrowing was on the decline and used only to return previous debt. The growth in foreign exchange reserves was largely on the back of an outstanding surge in the inflow of workers’ remittances and the current account surplus in the first 11 months of previous fiscal year 2020-21.

The central bank is scheduled to report the current account data for the full year later this month.

The remittances sent home by overseas Pakistanis grew 27% to an all-time high of $29.4 billion in the previous fiscal year.

In addition to that, the country received another $1.6 billion in unconventional remittances through the Roshan Digital Account (RDA), which offers lucrative returns to non-resident Pakistanis on investment in different assets in their home country.

Interestingly, the country’s export earnings also improved during FY21.

Pakistan is undertaking economic reforms under the International Monetary Fund’s (IMF) ongoing $6 billion loan programme.

The lender has, however, delayed the sixth economic review till September and has withheld the next loan tranche in the wake of disagreement with Pakistan over some of the issues.

The government has resisted a further increase in power tariff aimed at controlling the circular debt and believes it will be able to rein in the growing debt through other measures.

In another development, the central bank reported last Thursday (July 8) that it had received $1 billion as government of Pakistan loan disbursement from China and $440 million from the World Bank in the week ended July 2, 2021.

Alpha Beta Core CEO Khurram Schehzad said that Pakistan's reliance on foreign debt has continued to increase "which is not good for the domestic economy."

He said the government has taken more debt from global markets mostly to repay the previous loans instead using it to pace up economic activities and for productive options like setting up import-substitution and export-based industries in the country.

The government's gradual shift towards acquiring long-term loans like for 30 years was a step in the right direction, as it would buy time to the government to fix fundamental issues and implement the much needed reforms in the domestic economy, he said.

Pakistan's outstanding foreign debt has increased by 4.5% (or $3.92 billion) over the past one year to $90.28 billion by end of March 2021 compared to $86.37 billion in March 2020, according to the State Bank of Pakistan (SBP).

The foreign debt-to-GDP-ratio has, however, dropped to 29.5% in March 2021 compared to 34.4% in March 2020, it added.

The drop in ratio was seen due to expansion in the domestic economy during fiscal year 2021 to 4% compared to contraction of 0.5% in the prior fiscal year 2020.

Schehzad said the government faces a challenge as to how to increase export earnings and attract potential foreign direct investment (FDI) in the country, which are a must to turn around debt-driven foreign exchange reserves into exports and investment driven reserves.

He said the outlook suggested that the balance of current account would turn into a deficit of $5-6 billion in the current fiscal year 2022 compared to a nominal surplus in the first 11 months of the previous fiscal year 2021.

The deficit would be seen due to significant increase in international petroleum oil prices and higher other imports in the growing economy.

He said the government may come up with more incentives to attract FDIs and technology transfer into the country. Besides, it needs to implement reforms in the areas including energy, fiscal, debt and governance to attract foreign investment and other sustainable inflows into the economy.