A day after revival of the International Monetary Fund (IMF) programme, Pakistan on Thursday pitched around $2 billion worth of Eurobonds to the global investors, testing the international capital market after over three years.

The finance ministry has begun the virtual road-shows for $1.5 to 2 billion Eurobonds and the price will be discovered by Monday evening, said a senior government official.

While feeling confident about getting better price under the IMF umbrella, Pakistan is entering into global capital markets after over three years. This will be first global market transaction, being carried out by the Pakistan Tehreek-e-Insaf (PTI) government.

The investors’ conference began after the IMF Executive Board approved four pending reviews of Pakistan’s economy for October 2019 to March 2021 period and also sanctioned the release of $500 million tranche.

But all was not rosy, as the government narrowly avoided a censure and sanctions by the IMF due to reporting of inaccurate data, thanks to “lack of interagency coordination”.

In April 2019 exchange of data with the IMF, the government could not report Rs357 billion worth of sovereign guarantees to the IMF, which were issued in 2015-16. These figures were already in public domain and had been reported by The Express Tribune at that time.

Sources said that the initial vibes showed that Pakistan would be able to get a better deal and bonds could be floated at very competitive rates. The investors who would invest in these bonds and earn profits will not be required to pay up to 30% income tax along with other taxes.

In January, the cabinet exempted investors from income tax after the finance ministry told the ministers that without exemptions, the sovereign bonds would be “less appealing to the international investors”.

In November 2017, Pakistan raised $2.5 billion from global capital markets through a five-year Sukuk and 10-year Eurobond in the largest transaction at close to one of the lowest rates. The government raised $1 billion through Sukuk at 5.625% and the rest of the $1.5 billion were generated through 10-year bonds at 6.875%, which was 455 basis points above the corresponding 10-year US Treasury benchmark rate.

The government is heavily dependent on the external borrowings to meet its financing needs and to keep the gross official foreign exchange reserves at a minimum threshold. This was because of almost stagnant exports and declining foreign direct investment.

IMF Statement

In its statement issued after the board meeting, the IMF has acknowledged measures that Pakistan took to revive the bailout programme but cautioned that the road ahead remains challenging.

Antoinette Sayeh, Deputy Managing Director of the IMF, said that the Pakistani authorities have continued to make satisfactory progress under the Fund-supported programme, which has been an important policy anchor during an unprecedented period.

“Strong ownership and steadfast reform implementation remain crucial in light of unusually high uncertainty and risks”, said the deputy managing director. She added that the fiscal performance in the first half of FY 2021 was prudent, providing targeted support and maintaining stability.

But going forward, “further sustained efforts, including broadening the revenue base, carefully managing spending and securing provincial contributions, will help achieve a lasting improvement in public finances and place debt on a downward path,” she continued.

“Reaching the FY 2022 fiscal targets rests on the reform of both general sales and personal income taxation.”

Sources said that Pakistan would have to take additional revenue measures of over Rs700 billion in the next budget to secure the approval of the fourth tranche. The personal income tax of the salaried class would go up and the sales tax exemptions would also be withdrawn. This is in addition to Rs140 billion worth corporate income tax exemptions that the government withdrew last week.

The IMF said that the SBP’s current monetary stance was appropriate and supports the nascent recovery. Entrenching stable and low inflation requires a data-driven approach for future policy rate actions, further supported by strengthening of the State Bank of Pakistan’s autonomy and governance, it added.

However, the government has met with stiff opposition to its plans to give autonomy to the central bank. The IMF said that the market-determined exchange rate remained essential to absorb external shocks and rebuild reserve buffers.

The IMF stressed that in order to stop circular debt accumulation, the circular debt management plan and the National Electric Power Regulatory Authority Act amendments would help restore financial viability through management improvements, cost reductions, regular tariff adjustments, and better targeting of subsidies.

Inaccurate reporting

The IMF issued a separate press release to report breach of its Article VIII by Pakistan. “New information that came to the authorities’ (Pakistan) attention, and which was shared with Fund staff, has revealed that the data on government guarantees dating back to FY 2016 was reported inaccurately”, said the IMF.

“The revised data indicates a nonobservance of the performance criteria on government guarantees at end-September 2019 by a margin of Rs357 billion (about 0.9% percent of GDP), which resulted in a noncomplying purchase and a breach of obligations under Article VIII, Section 5 of the IMF Articles of Agreement.”

The Article VIII relates to provision of accurate information. If the inaccurate information is because of lack of capacity, the IMF directs for taking measures to strengthen the capacity, like it did in this case. The IMF said that the government previously reported that the condition had been met with a margin of Rs55 billion at end-September 2019.

The IMF said that Pakistan has now taken strong corrective actions to address institutional and technical shortcomings that gave rise to the inaccurate information. The government has set up a working group to reconcile and cross-check guarantees and debt data.

It has given additional powers to the Debt Policy Coordination Office (DPCO), to act as custodian of all guarantees issued by the federal government; and will publish a semi-annual debt bulletin that consolidates key debt statistics. The government has also promised to include a list of all new guarantees expected to be issued in the fiscal year 2021-22 budget to be submitted to parliament.

“The non-complying purchase arose as a result of a lack of interagency coordination in the compilation of the government guarantees provided by the federal government to state-owned enterprises that contributed to incorrect estimates of the government guarantees, starting as far back as FY 2016”, said the IMF deputy managing director.

The Executive Board decided not to require further remedial action in connection with the breach of obligations under Article VIII, Section 5. The IMF also granted a waiver for the non-observance of the quantitative performance criterion on sovereign guarantees.

The sources said that the tax collection figures reported by the Federal Board of Revenue (FBR), numbers of return filers and status of the circular debt and subsidies were also contradictory in various government publications.