ISLAMABAD, Jan 25: Pakistan’s plan to raise over $1.2 billion through international bonds and depository receipts shortly has stirred a debate within the official quarters and the top authorities have called a series of presentations on the subject to reach a conclusion.

“The authorities are questioning the wisdom behind raising funds from the international market through bonds at around seven per cent interest rate when country’s own $3.2 billion hard earned reserves placed with foreign banks are yielding only two per cent return”, a senior official said.

As a result, the country would have to pay an additional amount of about $250 million over a period of five years at an annual rate of $50 million. Prudence in the management of foreign reserves has become the central point of debate. Some of the officials argue that the government should now move to revise its rate of return on $3.2 billion placed with the foreign banks.

Adviser to the PM on Finance Dr Salman Shah, Secretary General Finance Naveed Ahsan and Secretary Finance Tanveer Agha were not available for comments.

State Bank of Pakistan sources said that Prime Minister Shaukat Aziz had desired to have a series of presentations from the ministry of finance and the central bank soon after his return from the United States on Thursday. These sources said President Musharraf would also be briefed about the situation shortly.

The government, these sources said, was eying at $650-$800 million bonds in about two months time but may go for even higher figure subject to market response. Slightly later, the government would also be targeting about $500 million through Global Depository Receipts (GDRs) within this fiscal year.

Similarly, another major issue in the domestic market will be a substantial amount of local currency Sukuk bond to facilitate local banks to get some return on money they currently keep with the central bank free of cost.

The federal government, said these sources is worried about the continuous depletion in forex reserves despite higher privatization proceeds of about $2 billion including major transactions of PTCL and KESC and about $2 billion of earthquake related inflows over the last four months.

After accounting for about $2.4 billion inter-bank reserves and over $1 billion swaps out of a total $11.3 billion, the net amount of foreign reserves with the central bank stand at little over $8 billion. This amount is less than six months of import bill which means that the country has returned to the early days of President Musharraf’s rule, they said.

Informed sources said flight of capital, inter-bank market operations and reserves management were some of the areas the policy makers were reviewing at present as total reserves dropped by over $1.6 billion over a period of about one year from about $13 billion to about $11.3 billion at present despite higher inflows. If swap deals are deducted, the overall reserves would be well below $11 billion, they said.

These sources said about $3.2 billion the State Bank of Pakistan placed with international banks about two years ago for higher returns were yielding less than two per cent. On the other hand, Pakistan was currently paying about 6.75 per cent return on over a billion dollar Euro and Sukuk bonds while IMF programmes that normally carry less than one per cent interest rate have been turned down.

This alone is causing considerable dent to the reserves, much higher than about $300-400 million additional annual oil bill owing to comparatively higher rates of petroleum in the Arab Gulf region.

Secondly, there has been a continuous flight of capital to the Middle East where a large number of Pakistanis were investing in real estate business. About $10 million go out of Karachi alone every day illegally without any check.

These sources said as a result of rising trade deficit, the exporters were holding back their foreign exchange while importers had the facility to get dollars at lower exchange rates and hence there was little coming into the inter-bank market at present.

The central bank had placed $3.2 billion with about 10 international banks in 2003 because of limited expertise at home to get higher yields and maintain reserves well over $12 billion mark but the high-cost officials hired for coordination with these banks lacked relevant exposure.

These sources said the difference between the return on these placements and LIBOR has now gone up by more than two per cent alone. The average return on $3.2 billion is less than 2 per cent while the LIBOR rate at present is around 4.5 per cent, the sources said.