Advisory committee: With low reserves, EAC advises against Euro bond

Published: February 16, 2014
Currently the private sector holds more foreign currency reserves than the State Bank, something which will undermine the bank’s regulatory role. PHOTO: FILE

Currently the private sector holds more foreign currency reserves than the State Bank, something which will undermine the bank’s regulatory role. PHOTO: FILE


The country’s leading economists have warned the government against tapping the international bond market with only $2.8 billion reserves in hand, urging it to wait for an appropriate time or else be ready to pay a higher price.

Independent economists who gathered in Q-Block – the seat of the finance ministry− under the umbrella of the Economic Advisory Council (EAC) also advised the government to present a realistic picture of the foreign currency reserves and exclude those held by individuals and commercial banks.

The issue came up for discussion when an upbeat Finance Minister Ishaq Dar shared the government’s plan to increase foreign currency reserves to $10 billion by next month. Economists sought an explanation of whether the government was also calculating privately held reserves as its own.

The minister, who is also chairman of the EAC, said that historically the reserves of commercial banks were treated as part of the total. Economists including Dr Abid Hassan and Dr Ashafque Hassan Khan advised the government that the actual reserves held by the State Bank of Pakistan (SBP) will be the determining factor in determining the price of the Pakistani bond by international investors.

The federal government is planning to float Euro bonds next month to raise money aimed at building foreign currency reserves, which dropped to a 13-year low of $2.8 billion by February 7. The $2.8 billion reserves are inclusive of the $500 million China deposit and forward contract obligations.  Even after adding the reserves held by commercial banks, the country’s total reserves were $7.5 billion.

Foreign investors will critically evaluate the payback capacity of the government, though, like any sovereign country Pakistan has never defaulted on its international obligations.

By the end of March 2014, a sizeable increase in foreign exchange reserves is anticipated with a projected figure of more than $10 billion foreign currency inflows adding up steadily, according to a handout issued by the Ministry of Finance.

The members of the EAC appeared dejected and marginalised during the second meeting of the EAC, as they were not clear about why the government constituted the EAC and what role they would have to perform.  Dr Sania Nishtar urged the government to define the role of the EAC and layout its expectations.

In the second meeting, economic experts were expecting that they would be asked to give their input on specific issues, according to a participant of the meeting who requested anonymity. During both meetings, most of the time was consumed by government officials and members, he added.

Finance Secretary Dr Waqar Masood gave a presentation on expenditure trends over the last five years, while Federal Board of Revenue chairman briefed the EAC members about the measures that the tax machinery wanted to take to improve an extremely narrow tax base.

It seemed that economists were sitting in a General Assembly, listening to one speech after another, but the problem of not taking decisions in the General Assembly persisted, said another member of the EAC.

The EAC members also urged the government to strengthen the country’s debt management office and appoint an independent but professionally sound person as its head, unlike the previous Director General Debt who worked more for protecting the interests of his previous bosses than for the state.

The EAC members advised the government to ensure authenticity of the official statistics, as the latest figures of growth in Large Scale Manufacturing (LSM) were contrary to growth trends observed in recent months.

Published in The Express Tribune, February 16th, 2014.

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Reader Comments (8)

  • unbelievable
    Feb 16, 2014 - 2:08AM

    Whether you call it a Euro Bond, Islamic Bond or whatever – given Pakistan’s economy the effective interest rate will translate into what is commonly referred to as a “Junk Bond” – probably the most expensive form of financing available – a Last Resort which should be avoid if possible.


  • sr
    Feb 16, 2014 - 2:50AM

    There is a crisis brewing and it is surreal how no one seems to care.


  • Careful reader
    Feb 16, 2014 - 6:18AM

    The nawaz government does not care about the EAC. The government is a dictatirship heading towards default.


  • Saad
    Feb 16, 2014 - 8:59AM

    The idea of further increasing the borrowing with less than $3 billion in deposits, is bizarre.

    As suggested in the article, not only should the debt management office be run by a competent, independent and experienced professional; the economic committee and ministry of finance should be headed by a seasoned economist.

    Currently, these critical positions are held by a chartered accountant, and his only expertise is that he is related to the sitting PM (just like the chairman of the youth loan scheme).

    [Chartered accountants are in no way (except for may be basic introductions in their courses) trained to deal with macroeconomic conditions and anomalies.]


  • Sardar Sahib
    Feb 16, 2014 - 5:10PM

    The last time Mr Nawaz Shariff was in power he along with Mr Surtaj Aziz conveniently took over all the foreign exchange accounts of citizens of Pakistan almost 20 Billion dollars were stolen .Since then the Pak Rupee has been in free fall…


  • Muslim Leaguer
    Feb 16, 2014 - 7:44PM

    @Sardar Sahib: Do you have any proof? Because the State Bank of Pakistan has confirmed (in its annual report of 2001, published during Musharraf regime) that the entire money borrowed under National Debt Retirement Program (NDRP-qarz utaro milk sanwaro) has been repaid and secondly, the reserves have never been equal to USD 20Bio not even during the post 9/11 windfall gains.
    In 2005, Musharraf government borrowed funds from international market through Sukuk Bonds by mortgaging the Motorway M-2 (constructed by Nawaz Sharif). Similarly, Zardari’s government borrowed funds through mortgaging Quaid-i-Azam International Airport Karachi (constructed by Mian Nawaz Sharif).
    The previous governments of Musharraf and his NRO-beneficiary Zardari have borrowed heavily and the debt repayments are now squeezing our forex reserves.


  • careful reader
    Feb 17, 2014 - 12:37AM

    @Muslim leaguer: Get your facts in order please. Musharaff’s govt decrease debt as a percent of GDP. Yes the Zardari govt borrowed like crazy.


  • Nida Alvi
    Feb 17, 2014 - 12:25PM

    @careful reader: “Musharaff’s govt decrease debt as a percent of GDP“.. because of 2 reasons:
    1. Heavy amount of US$$$ started pouring into Pakistan immediately after the decision to jump into war on terror post-9/11. Not to mention that Pakistan was getting a fraction of it’s actual expenses (not to talk about economic opportunity loss) and lately the CSF reimbursements are now much delayed.
    2. The GDP was re-based during 2004-05. As a result, the per capita income showed a jump of more than 30% and Pakistan was removed from the list of LDCs (Less Developed Countries). Consequently the trade subsidies were withdrawn and our exports to EU were lost to Bangladesh.
    These measures were merely cosmetic nature and that is why were not sustainable.Recommend

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