The government has received three bids from prospective financial advisers and one of them will be hired to put in place a structure for floating a $1-billion Eurobond, which will prove to be a test case of the country’s claim of international recognition of its improved economic conditions.
In response to an advertisement placed by the Ministry of Finance, three bidders submitted technical and financial offers, say officials. These were Citibank, Deutsche Bank and Standard Chartered Bank and their bids would be technically evaluated early next week.
Citibank and Deutsche Bank were also financial advisers for the last two bond offers.
The country is expected to raise at least $1 billion through the upcoming Eurobond offer, however, officials believe the actual size will depend on the government’s external financing needs.
Factors like realisation of privatisation proceeds and disbursement of the Coalition Support Fund (CSF) by the United States will determine the actual size of the bond.
The US has expressed doubt about the willingness of Pakistan taking military action against the Haqqani network, which is blamed for many deadly attacks in Afghanistan, and that may create problems in the disbursement of CSF.
The government is estimated to receive $1.5 billion in CSF in the current fiscal year 2015-16, of which it got $337 million in the first month.
The bond issue will reflect whether the claim that the country’s macroeconomic indicators have improved, which is also recognised by international financial institutions, is true.
Finance Minister Ishaq Dar often argues that the government’s efforts to turn around the economy gain more recognition from the international community including the world media than the local press.
However, the rate of return at which global lenders will subscribe the Eurobond will be a determining factor in this regard.
In March last year, the government raised $2 billion by floating five and 10-year dollar-denominated bonds at interest rates ranging from 7.25% to 8.25%. In the second offer, five-year $1-billion Ijara Sukuk were issued at 6.75% return.
A successful offer this time around too will be instrumental in boosting the country’s foreign currency reserves to meet the International Monetary Fund (IMF)’s requirement.
In the sixth review of the $6.2 billion loan programme, the IMF had projected the gross official reserves at $20.1 billion for the current fiscal year, but reduced it to $17.1 billion in the seventh review.
Plunging crude oil prices and a slowing domestic economy were the main reasons behind the scaling down of foreign currency reserves target.
In the sixth review, the country’s gross external financing requirements for the current fiscal year had been assessed at $8.6 billion, which were also lowered to $6.3 billion in the seventh review.
The IMF has not yet released a report on the eighth review, which will be unveiled by mid-September after the lender’s executive board meeting.
The plan to borrow $1 billion through Eurobond, the third such issue in two years, suggests that the government will continue its policy of tapping global capital markets in a bid to build the foreign currency reserves.
This dollar-denominated bond is part of the $9 billion foreign economic assistance projected for the current fiscal year.
In this period, the country will also borrow $1 billion from the Jeddah-based Islamic Development Bank and ask China to roll over a previous $1-billion loan. Funds from these sources will help avert pressure on the rupee, which has come under strain in the past one week.
While the government’s reliance on dollar-denominated bonds continues, there is growing criticism of the strategy to build reserves through what many analysts call unsustainable and expensive means.
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