Pakistan experienced its worst debt crisis back in the 1990s when the total debt to GDP ratio rose to a staggering 99.3%, the highest at that time in all of South Asia. The nineties saw the slowest growth, highest inflation and a state of economic affairs that no one expected a quick recovery from. That is when financial authorities first resorted to issuing Eurobonds to help reduce the country’s debt burden, and it was a valid choice as it bought us the time we desperately needed to avoid default. Together with help from international donors and other sources of finance, the country was able to avoid failure of repaying its massive debt. In the relatively stable decade that followed, more Eurobonds were issued to retire the burden of those bonds due to mature, as the country’s meager foreign reserves didn’t allow for full payment and the government repeatedly announced its intention to stop taking assistance from the IMF. However, these later bonds were issued in the presence of alternative, possibly less expensive sources of finance and dependence on international financial institutions (IFIs) remained an important characteristic of the economy. The pretext was maintaining a presence in the international capital market, and while this may be important for a country to do, it came at the cost of raising the overall burden of debt due to the high interest rates offered for these bonds. Initial issues were justified as they came at a time when the country had the highest possible risk of defaulting on its debt, but the frequency with which Eurobonds are issued currently is far from understandable, with no real justification for these actions.

Developing countries have been known to use Eurobonds as a source of healthy development finance in the past, and rightly so, as the money being raised through this channel can fuel economic activity. Countries such as Ghana have raised billions of dollars over the year by issuing Eurobonds of varying maturity lengths, but their interest rates are much lower than the extremely high 8.25% that Pakistan offered on its previous issues in the last two years. There are two things to note: the bonds currently being issued by Pakistan are not directed towards development finance and are merely a source of refinancing existing debt, and Pakistan is not currently at a risk of default. What then, justifies these issues and the government’s intention to continue raising finance in this manner? If not guided properly, authorities in developing countries can find it far too convenient to acquire large amounts of money and use them to finance budget deficits instead of investing them in productive sources. A similar case can be seen for Pakistan, where announcements to raise money through these bonds have been met with valid criticism.

This source of finance has undeniably been used by Pakistan in the past as a tool to raise money from the international capital market, but what incentive do we have to undertake such frequent withdrawals of Dollars at high rates? Impressive risk scores, large foreign exchange reserves and high expected GDP growth rates are thrown around to appease critics, but what does it mean when it is the loans and financing schemes by IFIs that have induced high reserve accumulation? With a GDP growth rate of 4.2% in 2014, Pakistan is ambitious in promising 6.5% growth in the coming financial year 2016-2017. If sound macroeconomic growth is a reality, why is it that Pakistan settles for such high interest rates on Eurobonds? The large cost associated with high interest rates is not justified even if macroeconomic prospects ensure unprecedented growth and prosperity. Now that US interest rates are non-zero and expected to steadily rise over the next few months, the international capital market will undoubtedly press for higher interest rates on bonds elsewhere. Because of this and a multitude of other reasons, now is not the right time to plan staggered Eurobond issues totaling $4 billion in 2019, as it will make for a high repayment at maturity. It appears that Pakistan is desperate to sustain its current debt secure façade. Maintaining its presence in the international market is not a good enough reason to issue bonds with such high frequency, and at alarming interest rates. It is baffling to say the least, that such measures are being undertaken at all.

The medium term debt management strategy announced the government’s plan to issue multiple Eurobonds in its time, totaling $1 billion for the financial year 2015-2016, half of which was completed in September 2015. Between financial years 2016-2017 and 2018-2019, the government has expressed its intentions to raise another $3 billion through the same channel. The Eurobonds to be issued this year are mainly to retire the repayment of maturing bonds, on top of which the government announced the intention to take short-term loans from IDB and commercial banks to finance imports, highlighting the possibility of a current account deficit. Given world oil price movements, there has been a negative effect on import tax receipts, which are a major source of revenue for the government. Instead of taking more money from every source we can possibly find, the focus at this point in time should be on fiscal consolidation, and a move away from issuing more debt.

It is imperative that we acknowledge the fact that Pakistan is engaging in debt swaps to protect itself from failure of repayment, something that must be remedied as the cost of our borrowings is being elevated much more than it should. When Eurobonds are issued in the international capital market, they should be invested in productive activities that generate a healthy return in order to make such bond issuances fruitful, not to extend the country’s payback period at the cost of higher eventual payments by future governments. Pakistan might undoubtedly be at a turning point in its history where its potential in economic growth is impressive, but we must not ignore the obvious. If Eurobonds are twice oversubscribed, it does not necessarily mean the country has an improving investment profile. In fact, the opposite is reflected in the unusually high interest rates offered on these bonds. Exchange rates are susceptible to change, and very high interest rates coupled with a possibly higher value of the dollar in the future can affect repayment by a great amount. The risk of default on its loans may not be visible at the horizon and Bloomberg has rated Pakistan’s risk of default in the next 5 years as being medium, but it does not mean that policymakers continue making unhealthy choices, which future governments will have to face the brunt of.