The Government of Pakistan has since successfully floated the Euro-bonds. There has been heavy over-subscription to the extent of four times the amount offered. The interest rate is 6.75 per cent per annum.

The Finance Minister has stated in London that the proceeds of the bonds will be used for repayment of the expensive external debt. It is still not clear whether the government will retain the entire amount of U.S.$ 2 billion or will restrict itself to the originally programmed amount of $ 500 million only.

This matter was on the cards at the government end for quite sometime and it may not be out of place to refer here to the purposes of the floatation as embodied in the article contributed by Dr Ashfaque Hasan Khan, Advisor in the Ministry of Finance, (Dawn-EBR dated November 17-23,2003) which are:

(a) Pakistan was out of the bonds market for several years;

(b) it will help in seeking foreign direct investment (which was $ 798 million only during the fiscal year 03 and included the amount of the privatization proceeds of the United Bank Ltd, viz $ 207.5 million),

(c) despite high reserves, many countries are borrowing in the bonds market,

(d) by reaching the diversified pool of international investors, Pakistan will be able to show its economic turn-around,

(e) the wide dissemination of Pakistan's credit story was of particular importance given the interruption to the country's access to international private capital that occurred in late 1990s as a result of external payment pressures etc.

The Finance Minister's recent perception that the proceeds of bonds will be used to retire the expensive external debts does not corroborate Dr Khan's earlier point of view. Dr Khan's arguments also donot possess the real force.

They rather contain lacunae in as-much-as Pakistan went twice to international bonds market in 1990s; firstly in the earlier part for $1 billion and secondly in 1998 for $ 700 million when the first issue was liquidated while the Doctor talks of interruption to the country's access to the bonds market during that decade.

Let us now have a brief look on the finance minister's current assertion that the proceeds of the bonds will be used to retire the expensive external debt. We append the table showing the details of the (estimated) outstanding amounts of the expensive external debts: Expensive external debts.

The above data has been taken from Table 1 page 104 of the State Bank of Pakistan's report for the second quarter of the fiscal year 03. The amounts owed to the other multilateral- Asian Development Bank have not been made available in the aforesaid table.

In the SBP's annual report for the fiscal FY 03, the debts owed to the multilaterals have been clubbed together and the figures relating to the ADB are not separately available.

However, the government had recently prematurely repaid a sum of $ 1.17 billion to the ADB without indicating the interest rates which were applicable to the relative debts.

The government has also not advised the public the quantum of the premium which was paid to the ADB on affecting premature repayment. These two informations are very vital to arrive at the correct assessment of the pros and cons of the premature repayments.

The Finance Minister has also been talking about the premature payment of $ 1 billion to the IBRD. These debts carry interest at 6.75- 7.5 per cent p.a. It is not clear how much benefit will accrue to the government if it repays the same with a new debt contracted at 6.57 per cent p.a. after accounting for the premium which will be required to be paid to the lender on prepayment.

The commercial loans given in the Table contracted at LIBOR + 1 to LIBOR + 2.65 per cent are cheaper than the current Euro-bonds as they have been contracted at 5.3775 per cent above 12 months' LIBOR as it was 1.3725 per cent p.a. on 13th February, 2004 and hence there should be no question of repaying these loans out of the proceeds of the current bonds.

The private loans/credits given in the Table are not required to be repaid by the government as it is the responsibility of the concerned borrowers; government/SBP is only required to provide the required amount of foreign exchange through inter-bank market.

The borrowings from the IMF are also cheaper than the current Euro-bonds rate because the "Basic rate" mentioned in the Table is a floating rate which is currently put at 1.58 per cent and after adding a 150 basis points thereto, the actual interest rate works out to 3.08 per cent p.a. which is much lower than the bond rate of 6.57 per cent p.a. Hence, with bonds proceeds, there is no question of retirement of the IMF debt.

From the above study, it can be concluded that Finance Minister's assertion that bonds proceeds will be utilized for prepayment of the expensive external debts is not plausible.

The factual position seem to be that though the annual quantum of borrowings from the IBRD and the ADB has been raised from $ 500 million each to $ 1 billion each, which did not warrant fresh borrowings at all, but since the premature repayment of $ 1.17 billion already made to the latter and $ 1 billion proposed to be prematurely repaid to the former has created/would continue to create a temporary rupee gap in the government budget during the fiscal owing to scattered fresh disbursements by these multilaterals over the year, the floatation of these bonds has been launched to fill that gap up.

In 1998-1999, 12 months' LIBOR ranged between 4.75125 p.a. on 31st October,1998 (minimum) and 6.28625 per cent p.a. on the 30th October,1999 (maximum) while fixed interest rate applicable to the bonds then contracted was 10 per cent p.a. The bonds were obviously not floated during October,1998.

During the rest of this 2-year period, LIBOR remained over 5 per cent p.a. Thus these bonds were contracted by adding a margin of less than 5 per cent to the LIBOR. This margin in all probability would be around 4 per cent because as given in the Table, private loans also carried interest at 4 per cent above LIBOR.

It may be remembered that those days were very precarious viz-a-viz the external sector: the country was working on the foreign exchange reserves of $ 1-1.8 billion only, there was serious current account deficit, repayment of private sector debt was temporarily halted, the country's credit rating was poor.

In those precarious circumstances, interest rate on the bonds was fixed by adding a margin of around 4 per cent to the LIBOR. Currently, when our foreign exchange reserves have improved to over $ 12 billion, our current account has been tuned into surplus, our credit rating has been upgraded by the international rating agencies, we have contracted the bonds presently by adding a margin of 5.3775 per cent to the LIBOR.

The recent development is that the government has realized that the contracted rate is on the high side and hence it is endeauvring to shift from the fixed rate to floating rate structure and the finance minister expects a reduction of 2 per cent in the interest rate.

If that happens it looks alright because interest rates are unlikely to rise during the next two years or so because the Federal Reserve chief intends to keep the historically lowest rate for two years or so.

If the shift becomes uneconomical and the rates show increasing trend after two or three years the government can again consider another swap with a view to reverting to the fixed rate structure.

Incidentally, it is said that during the periods of crisis, having domestic debts make the governments less vulnerable than their having the external debts. We have had a good experience of that during 1990s.

The country is awashed with liquidity and government could/can conveniently issue (and has also issued in the recent past) rupee denominated Pakistan Investment Bonds of 5-year tenure carrying interest at 5 per cent p.a. The net burden on the exchequer further stands reduced to 4.5 per cent p.a. when the withholding tax is accounted for.

In the case of Euro-bonds, net outgo of interest will be 6.57 per cent p.a. Thus the tax payers have to assume the extra burden of 2.07 per cent p.a. without any valid reason.

This also depicts contradictions in the policies of the government. On the domestic front, it is squeezing the savers by reducing the returns on savings-whether they are in the bank accounts or in the National Savings Scheme (NSS) instruments but is offering tax-payers' money to the foreign investors.

So then what is the conclusion: currently the bonds have been contracted at a very high price and without the real need and justification.