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Will RMB bond help control the deficit?

Updated March 12, 2018

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Pakistan is actively considering issuing Renminbi (RMB) Bonds, equivalent to $1.5 billion, in order to raise resources for settling voluminous payment obligations with China without straining the foreign exchange reserves.

Some participants of the meeting on the economy, held in Islamabad last week, told Dawn that the current trade and remittances data was pulled out by some stalwarts to underplay economic vulnerabilities. However, the fiscal and trade balance wedges were too wide for small talk to cover.

While clinging on to the wishful perception the meeting did ponder possible sets of interventions to ensure economic stability over the upcoming critical six months phase: caretaker set up and general elections.

High-placed sources in the government and banking circles confirmed to Dawn that a return to the IMF fold has been ruled out in the immediate future. The reason presented was the donor’s stabilisation conditions could rupture the current growth momentum.

‘There are several options on the table to deal with problems on the external front if the situation demands direct action,’ says Dr Nadeem Javed

The tilt in the said meeting was in favour of an RMB bond, said to be a tried and tested option. It was used earlier in 2013 when the country faced a similar situation of growing external/fiscal imbalances and the risk of sovereign default amidst falling reserves, in the closing days of the last PPP-led government.

“It is unfair to draw parallels between 2013 and 2018. The situation was much harsher and risks starker back then. The economy was weaker, smaller and more vulnerable. It was battered by the 2010 and 11 floods, the security situation was worse, investors were reluctant and the energy crisis was deeper.

“If we managed to sail through choppy waters five years back we sure are better equipped to deal with it now if we tread carefully”, commented a former governor SBP while discussing the issue privately. He blamed the politicians for the country’s isolation globally.

“The RMB bond had to be issued in 2013 because the country’s banking sector did not show an interest in the Chinese currency auction. It pleaded that businesses declined to open Letter of Credits in a currency they have not dealt in before. As proper systems for currency swap were already in place the bond initiative yielded the desired targets and the rest is history”, a lady banker told Dawn.

Sartaj Aziz, minister planning did not respond to a query in this regard. Dr Nadeem Javed, Chief Economist Planning Commission, was confident that the economic growth rate, this time round, is not based on bubbles. “Economic growth has been achieved on the strength of real indigenous drivers, therefore, it can’t be muzzled easily”.

Discussing worries on the twin deficits over the phone from Islamabad he said, “There are several options on the table to deal with problems on the external front if the situation demands direct action. There are tacit arrangements with a host of friendly countries that can be activated to avert a Balance of Payment crisis.

“Yes, we can go for an RMB bond besides the import bill settlement, in part in local currency, using the facility of currency swap with China. Other options include: borrowing from the international market, activating currency swap arrangements with our trading partners to check the draw down of reserves, using the reserves and returning to IMF as a last resort.

“Hopefully the situation will not digress to a crisis level as steps initiated to restrain imports and encourage exports are yielding results. The growth rate of imports is being arrested through regulatory duties and exchange rate and exports are showing a pickup. Exports have risen by 11.8pc as compared to same period last year”.

Responding to Dawn’s question on the SBP role in the management of the situation the Central Bank mailed a detailed reply. On the RMB bond issue, it did not comment. For the benefit of market watchers and investors the full text of the response is reproduced below:

“The current account deficit might fall in the range of 4.5-5pc of GDP in FY18, which is higher than last year. For the last three years, our exports have gone down. There were global headwinds which also had an impact on Pakistan’s share in global trade, but we were probably losing more than others.

“At the same time imports kept on increasing and the balance of trade became more skewed than ever. The gap was always met by remittances, which were growing at around 13.7pc, on an average for the last ten years. However, we took a hit last year as remittances went down by 2.8pc year-on-year growth.

“The above picture is changing now. Our exports have started picking up across many sectors. Remittances have also increased by 3.5pc during the first seven months of FY18 over the same period last year.

“The pressure on the current account is challenging and can hamper stability. On a more general level when it comes to worries about the current account deficit, commentators often compare 2018 with 2008 and especially 2013. These are in fact different situations. In particular, 2013 was more of managing a higher external debt servicing situation, while 2008 was a massive oil price shock.

“Unlike in the past, we are in the middle of a large investment programme with important geopolitical implications. Therefore, the policy mix has to recognise this difference as well as the challenge.

“Only a fraction of the BoP situation today would be the old story. However, you cannot let your past policy mistakes crowd out your future policy thinking. Therefore, policy innovation in a forward-looking manner is needed and that’s what has been implemented. Corrective measures are in play and exports are picking up while remittances are stabilising.

“If you look closely, the policy mix has been about balancing the trade and financial channels without sparing administrative measures.

“To that effect, there is a coordinated effort including: cash margins, regulatory-duties, external borrowing through Sukuk and the Euro bond issue, market-led rupee depreciation and, to some extent, a forward-looking increase in interest rates by the independent monetary policy committee to essentially arrest excess demand until the supply side is in full swing.

“These measures are expected to help the economy grow at a pace that is compatible with the expected behaviour of the supply side and will help improve the balance of payments situation as well”.

Published in Dawn, The Business and Finance Weekly, March 12th, 2018

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