One, therefore, strongly feels that the strategy of having indiscriminate access to the overseas markets for borrowing/raising capital coupled with the sale of national assets to the foreigners will add to the country's foreign exchange payments liability.
Dec 25 - 31, 2006
The nation has been hearing from the government for quite a long time that the "begging bowl" has since been broken. However, we simultaneously heard from the government a few weeks back that arrangements are being made with the International Financial Institutions (IFIs) like World Bank etc. for obtaining loans of the unprecedented amounts of U.S.$ 6 billion, besides floatation of long term foreign currency bonds.
Recently (news item 18th December,2006), the government has announced that it has decided to immediately prepare and negotiate a $ 17 billion 15-year business plan with four leading international lenders for the construction of three major dams in the country.
Apart from the above, the federal government also appears to have empowered the provincial governments to contract loans directly from the IFIs.
In addition to the federal and the provincial governments, the authorities have allowed the banking sector to also pick up the begging bowl. As per the news item (appearing in Dawn dated 19th September, 2006), Habib Bank Ltd. (HBL) has signed a deal with the International Finance Corporation (IFC), an affiliate body of the World Bank, for availing the financing facility of U.S.$ 50 million (Rs 3 billion) for supporting its post-privatization expansion into retail, consumer and small/medium enterprise markets. It has been mentioned in relative news item that the proposed loan qualifies as tier-II capital and will further strengthen bank's strong balance sheet.
However, as per the report (appearing in Business Recorder dated 18th September), the proposed loan from the IFC will be utilized for the acquisition of a branch of a Chinese bank in China.
Further, as per the news item (appearing in the Business Recorder dated 31st October), the Cabinet Committee on Privatization (CCoP) has approved Global Depository Receipts (GDRs) plan of HBL, National Bank of Pakistan (NBP) and United Bank Ltd. The details about the amount involved have not been mentioned but the CCoP has directed the Privatization Commission (PC) to present the scheme before its board to prioritize the commercial banks' offering. The CCoP has also approved floating of the GDRs by the Kot Addu Power Company Ltd (KAPCO).
Earlier, MCB Bank Ltd had gathered a sum of $ 150 million through GDRs offering in the international market.
What does this all reflect? Enlargement of the begging bowl rather than breaking it? The phenomenon used by the government viz-a-viz breaking the begging bowl perhaps relates to the conclusion of the International Monetary Fund's "Poverty Reduction and Growth Facility (PRGF)" programme and thereafter not approaching the IMF for the next programme.
As mentioned above, there are two different reports about utilization of $ 50 million loan obtained by HBL from IFC - for domestic expansion and purchase of a branch of Chinese bank in that country.
If this is for domestic expansion, which will entail expenditure in rupees, it can be done from bank's local resources as the bank has a strong balance sheet. As per the information contained in the "Banking System Review for 2005" issued by the State Bank of Pakistan (SBP), capital adequacy requirement ratio of the bank is 9.4 per cent as against Basel II requirement of 8 per cent. The bank also has reserves and the accumulated profits over Rs 25 billion as at the end of 2005.
Apart from the above, the bank's after tax profit during 2005 amounted to Rs 9.646 billion. It has also made sizeable profits during the first three quarters of 2006. The contracting of foreign currency liability for meeting domestic expenditure - specially in the environment where our difficulties in the external sector are on the increase- can hardly be deemed as a prudent policy.
If the loan is for purchase of a branch of a bank in China, the bank could do it from the operational profits of its overseas branches.
The purpose of allowing NBP, HBL, UBL and KAPCO to issue the GDRs is not clear. If the intention is to eventually increase the capital base of these entities, the preferable option will be to ask them to float the shares domestically.
True that the international rating agencies have upgraded our rating and the floatation made by our organizations are being over-subscribed- MCB GDRs were oversubscribed. But would it be a prudent policy to freely provide access to the foreign capital markets for borrowing / raising capital when there is no pressing need for it, merely because the overseas financers are ready to provide funds?
Let us now examine the status of the "broken" begging bowl. During the fiscal FY-06, it has added a sum of USD 1.643 billion to the country's debt liability. The details are given in the table.
PAKISTAN'S EXTERNAL DEBT AS OF 30-6-2006.
(Figures in billion U S $)
(- ) 0.058
* Islamic Development Bank. Source: SBP annual report for 2005-06
As IDB / private sector loans are not accounted for in the government's books while IMF debt is accounted for in the SBP's books, the net addition of the external debt burden to the public ex-chequer stands at $ 1.595 billion. What is to be noted here is that the total borrowed amount disbursed is the sum total of the net addition to the debt burden plus the amortization made during the fiscal. Table 7.9 [page 153] of the SBP's annual report for the fiscal FY-06 puts the amount of the amortization during this fiscal [excluding amortization of IMF debt] at $ 1.059 billion. Thus this "broken" begging bowl has brought in external loans in the official account to the tune of $ 2.654 billion.
In case such rampant borrowings continue over the next decade or so, country's external debt burden (including $ 17 billion proposed loans for mega dams) by 2015 will cross $ 75-80 billion. The burden of remittances on account of profits of the national silver currently being sold to the foreigners for meeting the twin deficit- fiscal as well as current account in the external sector- will be in addition to the very heavy debt-servicing/amortization cost. How shall we be able to face the situation in that scenario has become a big question mark?
One, therefore, strongly feels that the strategy of having indiscriminate access to the overseas markets for borrowing/raising capital, when such needs can conveniently be met through domestic resources, coupled with the sale of national assets to the foreigners will prove to be a dangerous proposition in the long term as the policy will exorbitantly add to the country's foreign exchange payments liability while the serious efforts towards increasing the generation of foreign exchange at a massive scale to cope up with the situation seem lacking.