ISLAMABAD, Feb 13: Official and non-official circles here have expressed their dismay over what they termed an exceptionally high price at which the $500-million Eurobonds were launched on Thursday by Pakistan.

These quarters termed the selling of these bonds at an interest rate of 6.75 per cent "a mistake" because in their opinion due to very low inflation rates the world over, the international capital markets were already operating around 3-4 per cent or, at best five per cent.

An official told Dawn the London transaction of February 12 had shocked him and that he did not understand the rationale behind it. He said the government should have sought loans from the IMF and the World Bank at much lower rate (a maximum of two to 2.5 per cent) rather than entering a bond market at such a disturbing discount.

He attributed the oversubscription to the tune of $2 billion to the unusually high profits that "we were offering on our Eurobond". "And then oversubscription means that we would once again be increasing our expensive loans," the official said seeking anonymity. He regretted that the government, which could mobilize funds on two per cent through treasury bills, did not take a wise decision over the bond issue.

Former Punjab Finance Minister Shahid Kardar said that in the first place Pakistan did not need to mobilize foreign funds from the capital market because of $12 billion foreign exchange reserves which were already lying unutilized.

And if it all new funds were to be raised, he believed, the government should have sought commercial loans certainly available on cheaper rates compared to 6.75 per cent offered on the Eurobond. "This exercise is against all economic principles and I would also call it a mistake," Mr Kardar said.

Responding to a question, he said the government would justify its decision by saying that it wanted to enter the bond market to test its improved economic conditions.

"They would also say that they wanted to have diversified foreign loans but again this argument is not very convincing," the former provincial finance minister said.

Mr Kardar said the $1.1 billion debt which had been repaid to the Asian Development Bank was less expensive than the bond interest rate. "On the one hand the government is retiring its expensive loans and, on the other it is seeking funds through bond on higher interest rates and this is obsoletely incomprehensible," Mr Kardar said.

A source at a local multilateral agency said the IMF had opposed Pakistan's decision to raise funds through capital market because of their being very expensive. "I don't know what justification could be offered by your government to sell bonds on higher rates when we were ready to offer loans on much reduced interest rate," he said.

Another source said that one needed to put the whole issue in its proper context and hoped that the government would offer a convincing argument in defence of its action.