In the second largest single transaction in less than a year, Pakistan has raised $1 billion from international debt markets through the issuance of five-year dollar-denominated Sukuk bonds. This will help build foreign currency reserves to the satisfaction of the International Monetary Fund (IMF). This is good news, right?

Well, yes. Firstly, it restores some of the lost confidence in our markets after the failed deal to sell shares of the Oil and Gas Development Company Limited (OGDCL). And since the Sukuk Bond has been painted as an Islamically acceptable transaction, and it is issued with the backing of collateral, it is safe, and popular.

But let’s not count our chickens before they hatch. That investor confidence is at an all time high is a bit of an exaggeration by the Finance Ministry. One only has to look at the dips at the Karachi Stock exchange to know that all is not as rosy as it seems. Pakistan is a very risky market to invest in. However, returns are high and a smart entrepreneur will make great gains here. Additionally, our problem is not only of the value of the rupee, but of infrastructure. There are long delays when it comes to setting up a business, from getting phone, gas and electricity connections, to wrapping one’s head around tax policy and high commercialisation charges.

The 6.75% interest rate for $1 billion is 5.17 % over and above the benchmark five-year US Treasury rate. The profit rate of 6.75% compares favourably with the average weighted cost of comparable domestic debt of about 11% in Pakistan, and will save the country about Rs.5 billion annually in debt servicing. This again is a bit of a silly statement. One can’t compare 6.75% rate in US Dollar with 11% in Rupee. He would have to take into account the yearly depreciation rate of PKR against US and then the true rate might actually be around 20%. There is a lot of celebrating that Pakistan can pay back debt, when we don’t have export surplus from where we could generate extra USD, due to the fact that investor confidence is not high and does not lead to investment in actual economic activity in Pakistan.

So is this still a good thing? Well, no. The basic problem with raising reserves on issuing sovereign securities is that we will have to pay them back along with the profit that is at such a high spread above US T-Bills rate. These proceeds add to reserves, and also to our liabilities. If they are not efficiently used in an economic project that would generate earnings enough to pay these loans off, we will be in even more trouble.