Pakistan to issue another $1 billion Eurobond this week

After failing to get World Bank, ADB financing, govt turns to bond markets

ISLAMABAD: Pakistan will raise at least $1 billion from international debt markets in the next two days, choosing the easier but more expensive path of capital markets financing rather than implementing tough but necessary energy sector reforms and accessing the much cheaper financing available from international aid agencies.

Finance Minister Ishaq Dar left on Tuesday for the United States where he will lead the Pakistani team to launch a Eurobond. The bond will be priced on September 24 and is being underwritten by Citibank, Deutsche Bank and Standard Chartered Bank, which were appointed less than three weeks ago.

Finance Secretary Waqar Masood told Reuters that Pakistan was hoping to raise at least $500 million by selling its debt, but hinted that it could sell more. “We are not fixated on the size. We can definitely do more and we are open with regards to the tenor too,” he said.

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He hinted at issuing another bond, which was not part of original fiscal 2016 budget. “We will do a sukuk (Sharia-compliant bond) in … maybe the April to June quarter,” said Masood. Issuing a sukuk has become the government’s backup plan after it failed to implement the necessary energy sector reforms that would unlock funding from the World Bank, the Asian Development Bank, and Japan.

The Eurobonds are expected to be of either five or 10-year maturities, or possibly both. Based on the last issue, the interest rate is likely to be in the 7% range. By comparison, had the government implemented energy sector reforms, the country would have availed the same amount from the World Bank and ADB at a 2% interest rate for a period of 25 years.

The launching of the Euro bond, the third global issue in less than two years, highlights the government’s lack of commitment to structural reforms hampering economic growth, according to independent economists.

Although, the government had included $1 billion Eurobond in its annual budgetary estimates, it advanced the calendar and also decided to issue the sukuk. International lenders’ refusal to extend $1 billion in budgetary support before end of this month heightened the urgency to try luck in international debt markets.

The World Bank, ADB and Japan have withheld approval of $1 billion loan after they questioned the government’s commitment to reform the ailing energy sector. The government’s inability to implement promised reforms led to delay of approval of the loan, which was originally planned for April this year. It had hoped that the international lenders will disburse the amount before end of September, which is not happening, said sources familiar with the matter.

Under the Development Policy Credit-II, the WB was supposed to give $500 million in loan, the ADB $400 million loan and Japan $100 million in grant.

Earlier, in March last year, the government raised $2 billion by floating five and ten year dollar-denominated bonds at interest rates ranging between 7.25% and 8.25%. In the second attempt, the government issued five-year $1 billion Ijara-Sukuk bonds at 6.75%.

Read: Pakistan likely to issue $1b in Eurobonds in fiscal 2016

The government is raising the funds to meet the IMF’s conditions for the July-September period regarding increasing Net Foreign Assets, reduction in budgetary borrowings and increasing foreign currency reserves, the sources said.

As of September 11, the country’s official foreign currency reserves stood at $13.7 billion.

Published in The Express Tribune, September 23^rd, 2015.