Incoming: New loans of $2.2b to come in next two months

ISLAMABAD: Pakistan will receive $2.2 billion in fresh loans in the next two months including expensive borrowing of $500 million by floating Eurobond as the government has decided to pay even a high return of 8.5% for entering the global debt market after a hiatus of seven years. “The World Bank is set to approve extremely cheap loans of $1.7 billion in May,” announced Finance Minister Ishaq Dar here on Thursday. He was addressing a ceremony held for the soft launch of government debt securities at the Islamabad Stock Exchange. The launch is aimed at diversifying the investor base in government debt. Dar said the board of directors of the World Bank was expected on May 1 to approve two programme loans of $1 billion for energy and taxation reforms. By the end of the month, the board is likely to approve another $700 million for Dasu Dam and a Sindh government project. The $1.7 billion will be offered at an interest rate of less than 1% and will be returned over a period of 37 years. These loans were originally scheduled to be approved in December last year but got delayed due to differences over the timing and nature of reforms, needed to improve the failing energy and taxation areas. The government had decided to float $500 million Eurobond by mid-April, said Dar. “We have set an indicative interest rate of London Inter-bank Offered Rate (Libor) plus 6.5% for the bond.” At present, five-year Libor stands at 1.83% and the accumulative cost of floating Eurobond comes to around 8.5%. According to analysts, investors usually seek 1% to 1.5% more than the indicative price, which is being determined by calculating all types of risks associated with the repayment capacity of the borrower. International banks hired to give advice on the bond had planned road shows in the first week of April, Dar added. Last time, the Musharraf government had issued 10-year bonds at an interest rate of 6.75% above US treasury rates. Dar vowed that the government would establish thriving and deep debt markets, which he termed essential in order to get rid of commercial banks that had made the Ministry of Finance hostage. “Maturing debt instruments is a constant trouble for the government and the Ministry of Finance has become a hostage in the hands of banks,” he remarked. At the end of February, the total size of domestic floating debt, backed by government securities, was Rs5.4 trillion, of which Rs4.1 trillion or three-fourth of the total was held by commercial banks, according to the State Bank of Pakistan. Total size of domestic debt was Rs10.8 trillion at the end of January this year. Dar hit out at vested interests, saying they had opposed the move to offer government debt instruments to the general public for investment and tried to create hurdles. He said the government was trying to meet the International Monetary Fund’s (IMF) target for net international reserves and reducing borrowing from the central bank. PIB auction a resounding success The latest auction of 10-year Pakistan Investment Bonds (PIBs) was a huge success as the government received offers of Rs500 billion against the requirement of Rs150 billion and that too at a lower interest rate than the previous auction, he added. On the 10-year PIBs, a return of 12.9% will be paid, which has enabled the government to meet end-March target of reducing borrowing from the SBP to Rs2.255 trillion. Earlier, it missed the December target and had to seek relief from the IMF Executive Board. Dar underscored the need of building new infrastructure in the areas of energy, air and sea transport, agriculture and urban housing, which required massive investment. “Only 19 flagship infrastructure projects of the government need an investment of Rs3.4 trillion ($34 billion) in the next four and a half years,” he said. Published in The Express Tribune, March 28th, 2014.