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| 09 December, 2017

Pakistan to borrow $66.6bln from banks as devaluation looms

Government faces multi-pronged problem of devaluation of Pakistani rupee

A currency dealer counts Pakistani rupees and U.S. dollars at his shop in Karachi October 8, 2008.

A currency dealer counts Pakistani rupees and U.S. dollars at his shop in Karachi October 8, 2008.

REUTERS/Athar Hussain
Pakistani government is planning to borrow Rs4.375 trillion from commercial banks while the new Prime Minister Shahid Khaqan Abbasi is still trying to find its feet in a politically messy situation as illustrated by strong attacks by the Opposition parties. These are some of the questions Prime Minister Abbasi faces, as Ministry of Finance is planning to launch "attractive investment bonds to overseas Pakistanis," to improve their savings and strengthen Pakistan's forex reserves.

Yet another serious problem confronting the prime minister is tackling the multi-pronged problem of devaluation of the Pakistani rupee.

The government will get the bank credit by selling long-term papers and Treasury Bonds, during three-months from Novembery 17 to January 18 in order to fill the budgetary deficit, which is "large but still unquantitified" for FY-18. The State Bank of Pakistan (SBP) says it will sell Rs4.225 trillion three-, six- and 12-month treasury bills at the fortnightly auctions.

The government's borrowing record is huge and grim. SBP says: "The borrowing from commercial banks rose to Rs850 billion, between July 01, FY-16 and May 19 FY-17.

It was Rs502 billion in the like period of FY-16. "The government continued to borrow from the commercial banks to fill its budgetary gap and meet the shortfall in tax and non-tax revenues," SBP says.

However, Islamabad at the same time, repaid the banks Rs188 billion. "It missed the annual target of bank borrowing set at Rs741.3 billion for FY-17. It is already higher than the target amount."

If the government borrowing from the commercial banks in FY-18 stays as high as in FY-17, the banks will be left with very little cash for the credit-starved private sector. So far, the economy was looking up in FY-17, on the back of higher output of industrial products. It is, indicated by 5.6 per cent growth in large scale manufacturing. As a result, the private sector was demanding more credit to continue to fund the uptick. But if the credit is restricted, will the economy grow? The answer, obviously is "no."

The big budgetary deficit is not Abbasi's only headache, he is also facing a big trade account (TA) and the current account deficit (CAD), which are eating up the forex reserves. In order to stop the forex wrought, Abbasi is launching foreign bonds - including sukuk bonds and eurobonds for up to $3 billion. As exports declined and imports rose sharply over the last four years the forex reserves were seen at around $21 billion. It led to two dangerous habits: Finance Minister Ishaq Dar went on a beg-and-borrow spree to replenish the reserves, chiefly through expensive foreign credits.

The repayments of these loans starts in FY-18. Finance Minister Dar got several loans on high interest rates, some as high as 8.6 per cent. The second: because of the pressure on forex reserves, and widening TA and CAD deficit, a range of specialists, economists, currency changers, businessmen, exporters and international financial institutions have repeatedly demanded to devalue the rupee. Their proposed reduction in the value of the rupee against the US dollar, however differs form 5 per cent to 20 per cent. The Pakistani currency this week, was quoted at one dollar to 105.60 for selling and 105.40 for buying, in the inter-bank market. In the kerb, dollar was quoted at 107.4 for buying and 167.65 for selling.

The exporters, including the Federation of Pakistan Chambers of Commerce and Industry and the All Pakistan Textile Mills Association which is the worst hit as textiles, Pakistan's largest exports, heavily declined. Both organisations claimed "the over-valued rupee is the key cause of their reduced exports. "Our textile exports are down because the over-valued rupee has made them globally uncompetitive."

"The government-imposed taxes, high cost of imported and domestically produced inputs, expensive electricity and the overall cost of doing business have pushed export prices. Our expensive products are no longer accepted. As a result, textile exporters to the global market, like Bangladesh, and Vietnam, besides China and India have virtually ousted Pakistani textiles exports from many countries.

The government plans to launch a dollar-denominated bond of $500 million to $700mn during this year. "Eight to nine million overseas Pakistanis will be offered to invest in these dollar denominated bonds.

"If we offer them attractive rates of return, the bond issue will raise the overall amount of $500 million to $700 million," Zafar Shaikh, director-general, Central Directorate of National Savings, Ministry of Finance, says.

Reporting by M. Aftab

The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.

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