Petition against interest payments poses risk: Report

Govt plans to float $500m Eurobond in global market this month.

ISLAMABAD:

A draft report prepared by four international banks that have been hired to raise debt from the international market has said that a petition against interest payments poses the biggest risk to the country’s ability to service the debt.

The National Response Framework (NRF) report will be presented to prospective international bidders to allow them to study minute details of the country, from its geography to socio-political and economic conditions before investing in its papers.

Pakistan has decided to enter the international debt market this month, for the first time in seven years, and wants to issue at least $500 million worth of Eurobond of five-year maturity. The debt is being raised to support the dwindling foreign currency reserves, which could not be built despite entering an International Monetary Fund (IMF) programme.

The bond will be floated in the US market and will be registered with the US Securities and Exchange Commission.

The NRF has been jointly prepared by Barclays Bank, Citibank, Deutsche Bank and a consortium of Bank of America Merrill Lynch and KASB Bank. These banks have been hired as transaction managers. Bank Alfalah, Standard Chartered Bank and Silkbank could not qualify.

The government will pay slightly above 1% of the total money to be raised from the bond auction in fee to these banks.

The NRF informs prospective bidders that a petition is pending in the Supreme Court of Pakistan, seeking an order to stop the federal government from making interest payments on loans, under any name.

This comes at a time when the Federal Shariat Court (FSC) has decided to resume hearing of an interest payment case from March 24. The apex court had sent the case back to the FSC. The FSC has asked the Attorney General of Pakistan to argue in the case.

Talking to The Express Tribune, Ministry of Finance spokesman Rana Assad Amin said it was premature to comment on the content of the report, which was subject to many changes.

The report also highlights the risks that could destabilise the political system and also the implications of the war on terror for the economy and foreign investment.

Data credibility

The NRF appears embarrassing for the government on account of credibility of official economic data. It notes that the data reported in the draft may not be reliable as statistics produced by one ministry vary from the data reported by another ministry.

It observes that the data is authentic only to the extent of the ministry mentioned in the report as a source. However, the report notes that Pakistan is following the data standards prescribed by the IMF.

Statisticians and independent economists have long been questioning the credibility of the data related to unemployment, growth, poverty and fiscal deficit.

Unreliability of the data will give an excuse to investors to demand higher risk premium, which will make borrowing through bond float very expensive, according to an expert in the international market.

Government officials are anticipating a risk premium in the range of 5-6%, which is over and above the US Treasury bond rate currently at 1.44% for five-year papers. Pakistan may have to pay around 8% interest rate. In 2007, it had floated a 10-year bond at 6.75%.

The government is going to bid for an expensive loan at a time when cheap World Bank financing is available. But it depends on rationalising gas prices, according to sources.

Published in The Express Tribune, March 2^nd, 2014.

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