In the first capital market transaction over the last three-and-a-half years, the Government of Pakistan has raised $2.5 billion via selling Eurobonds at attractive interest rates.
The aim of this process was to raise the foreign exchange reserves of the country, which have been dwindling due to the overarching debt payments while the capital inflows are still minimum comparatively.
The government offered three choices to the lenders. The $1bn 5-year bonds were at an interest rate of 6pc, another $1bn of 10 years at 7.375pc, and lastly, $500 million of the 30-year bond at a cut-off yield of 8.875pc, sources in the ministry of finance and debt office told Dawn.
According to reports, the government had received oversubscription of up to $5.3 billion. This means that the demand for bonds was higher than the number of shares made available.
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However, it must be noted that the lenders charged a high-risk premium on the bonds driving the rates up. This made the bonds floated on the 30th more expensive than the ones the previous government did in 2017.
In November 2017 too, Pakistan raised $2.5bn in international bonds. This included a $1bn 5-year Islamic Sukuk at 5.625pc and another $1.5bn in 10-year Eurobond at 6.875pc.
There were speculations that the 30-year bond should be below 8%. However, in a Tweet appreciating the government, financial analyst Mr. Javed Hassan said, “30 years < 8% was always unrealistic. To get cut off @ 8.87% is truly excellent”, rebutting the claims of the critics.
30 years < 8% was always unrealistic. To get cut off @ 8.87% is truly excellent, especially keeping in mind GoP was able to raise $500mn. Pakistan now has access to long term mkt. It should be seen as a huge win especially when combined with achieving 6% cutoff for 5year paper
— Javed Hassan (@javedhassan) March 30, 2021
The rates of the bonds were too high to be resisted by the lenders. For instance, for the $1 billion raised via the bond of rate 6% and tenure of five years, the rate was 5.23% higher than the US benchmark rate.
Similarly, the $1 billion was raised for 10 years at 7.35%, which was 5.6% higher than the 10-year US Treasury rate. As mentioned above the rate was higher than the 6.875% Pakistan offered in 2017.
Lastly, Pakistan’s 10-year Eurobond was sold at an 8.875% interest rate – 6.5% higher than the corresponding US rates.
According to Mr. Hassan, these bond issuances are ‘spectacularly good’. He added that this will ‘remove the constant sword of Balance of Payment crisis hanging over the economy.” He applauded the Governor State Bank for doing this.
Contrasted with the short-term bilateral loans and expensive commercial borrowings, these long-term bonds are considered the preferred choice of instruments due to their long tenure and they come without any strings attached (unlike IMF’s loans).
Last Tuesday, Pakistan got the third Tranche of the IMF’s package, along with recent developments with the ADB providing a loan of $300 million, and six project agreements worth $1.336 billion with the World Bank.
The federal reserves remain depleted, despite the increase in remittances. However, with the recent grants by the international lenders along with the policy amendments government is making, the investor could find the country attractive. This is also shown by the rupee appreciation against the US dollar since the IMF tranche was released.
In the meantime, the World Bank does not see a speedy turnaround in Pakistan’s economic situation with a recent projection of a low 1.3% GDP growth rate and 94% debt-to-GDP ratio for the current fiscal year, against Hafeez Azhar’s 3% GDP growth projection and 87% debt-to-GDP claim a month ago.
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The global lender has said that the country’s economic recovery remains fragile and predicted a rise in poverty too. However, recovery is expected in the future.