Tuesday, 16 February 2016
Murdering Pakistan with Debt Trap
Pakistan issued $500 million worth of bonds with a maturity of 10-years at 8.25% in Eurobond market on 24th September 2015. This debt instrument has experienced extraordinary growth and is now floating in secondary market around 106.597 cents. Its value has increased by 7% after almost 35 days of its issuance which is considered to be surprising growth relative to other debt instruments in the secondary market. These $500 million Eurobonds have earned $33 million over face value in 30 days. Surprised?
Eurobonds issued by government of Pakistan have made someone rich overnight and seems like investors are standing in a queue to buy Pakistani bonds to get rich. Treasury bonds of other countries under 10-years maturity are floating in secondary market not more than 2%-3% interest rate. Although the interest rate of bonds have fallen down from 8.25% to 7.25% but it is still too high for an indebted country like Pakistan to pay for. The appreciation in the price of Eurobonds is because of 1% decrease in the annual yield rate resulting in $33 million profit to investors.
Previously, Government of Pakistan sold $2 billion worth of Eurobonds with $1 billion for 10 years maturity at 8.25% (which is 556 BPS above benchmark rate of 10-years US Treasury bonds) and rest of $1 billion for 5 years maturity at fixed 7.25% (which is 558 BPS above benchmark 5-years US Treasury rate) in international debt market back in April 2014. The government actually targeted $500 million worth of Eurobonds but got bids worth $6 billion and restricted to raising $2 billion; which according to government have shown interest of foreign investors in economy of Pakistan. These bonds are recently floating around 104.883 cents which is still higher than that of its issued price but lower than its last year’s record high of 110 cents.
Pakistan government has done three big international borrowing transactions in almost a year; two of them are discussed above and the third one is $1 billion worth of Sukuk bonds with 5-years maturity and borrowed at interest rate of 6.75%. Sukuk bonds are Islamic bonds backed by collateral and Government of Pakistan has pledged Islamabad-Lahore motorway for 5-years and that’s why interest rate is lower than that of Eurobonds transaction of $2 billion. Sukuk bonds were issued to restore lost trust of international investors after OGDCL transaction failed. Government is also planning to sell its shares in HBL, UBL, PIA, and PPL. Government of Pakistan has reported $20 billion in foreign reserves then why it is jumping into selling spree of national assets?
On 23 December, 2012 International Monetary Fund decided 0% interest on the loans of poor countries. Pakistan is repeatedly borrowing from national and international lenders to keep its economy going and has more than $67 billion of external debt to pay to different lenders and yet too excited to show the world that it is richer than the rich countries in the world. In comparison, Nigeria has issued bonds in secondary market at 7%, Egypt has issued its debt instruments at 6%, and interest rate of Middle East and other African countries is around 2.8%. Whereas, interest rate on 10-years US Treasury security is 2.05% as per 27th October 2015. Now imagine the difference between the annual yield rates of debt securities of US (trillion dollar economy) and Pakistan (billion dollar economy) 2.05% and 8.25% respectively and think about the health of both economies. We can totally mark the difference between trader’s government and democratic government. No doubt behaviors say it all.
Pakistan promised IMF to make reforms in energy sector to be able to borrow at 2-3% interest rate but failed to make any progress and that’s why Pakistan made a smashing entry to international debt market at interest rate as high as 8.25%.
Government officials say they have to repay maturing (2016) bond of same value issued in 2006 by then government. Question is why Pakistan isn’t generating revenue as a state? Why Pakistan has to borrow more to repay the maturing debt? Above all, the amounts of debt we are obtaining from different sources should be spent on jobs, education, cheap production of electricity, elimination of corruption, expansion of irrigation system, building of big dams, and state owned factories. Only this way Pakistan as a state can generate revenues and will be able to pay off its debts on its own. Borrowing more to pay the maturing debts will lead to debt trap that Greece is facing. Alarmingly, 47% of what Pakistan will generate as revenue will be used in debt payment.
We should be worried about Pakistan going into debt trap just like Greece. Greece has to borrow to pay for its previous loans and it is repeating this strategy for years. Pakistan is still better off paying its debts in time but this strategy would not work for long. We really need to mobilize our national assets to start generating profits so that we can be in a better position to pay off our debts from revenues rather than to borrow more to pay off previous debts. Pakistan is a money starved country but continuous borrowing isn’t the solution. Solution is progressive economic reforms, exploration of natural resources, and elimination of energy crises which is murdering our industries and hindering development.