The Eurobond issue

The word ‘debt’ has become a way of life for Pakistani governments, especially the current PML-N one, as it looks to swap one liability with another. While the finance ministry has stated that the recent Eurobond issue was oversubscribed — it had to be, given the coupon rate was as high as 8.25 per cent — it also added that the amount was restricted to $500 million to cover the forthcoming maturity, in March 2016, of another bond issued in 2006. The debt trap, neatly presented and articulated as ‘raising money in international markets’, will now see the country repay this particular amount 10 years later. The interesting thing is that the interest rate offered is the same as last year’s when Pakistan raised $1 billion, highlighting that investors placed the same value on the country’s economy as they did in March 2014. The bond issue will see Pakistan increase its foreign exchange reserves, but for only a six-month period, with the country set to repay its 2006 loan in March.

This is where the problem lies. Efficiency is only shown in borrowing money to retire past debts, which in turn leads to more liabilities. Economists have already criticised the government’s habit of borrowing from commercial banks, which crowds out the private sector from much-needed investment.

Even a roadside vendor understands that borrowing money should not be a form of escape, but a road to expanding business operations. The current short-term strategy to borrow funds and then use them to retire debt will not yield dividends. It will, in fact, force future governments to follow the same road. Even if one were to concede that there was need for the government to raise money to retire debt, it should be noted that the more expensive route was taken since international lenders had locked their money as Pakistan was unable to implement energy sector reforms during the period. The power sector has already cost the country billions in various ways. Now it is preventing the government from obtaining cheaper lending as well. When will governments realise that power sector corruption has started hitting Islamabad in a very profound manner? The strategy to increase indirect taxation is starting to max out. There is an urgent need for policymakers to focus on reforms, and not just numbers that look good only on paper.

Published in The Express Tribune, September 30^th, 2015.

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