The bond issue snafu
The Washington Post and the Wall Street Journal recently featured ADS from the State Bank of Pakistan (SBP) inviting all and sundry to purchase Foreign Currency Bearer Certificates (FCBC) with attractive premiums and no questions asked about the identity of either the purchasers or the source of funds. Notwithstanding the US$ 120000 charged by each of these prestigious Dailies for printing the FCBC offer, both papers followed up by scathing criticism of the purported “money-laundering” scheme. Motivated Congressmen from the US Senate and the House of Representatives, smarting under the attack by the domestic media for their history of issuing of rubber checks, jumped on this unfortunate AD with fervour and fury, if only to divert attention. Given that Agha Hassan Abedi and BCCI originated from Pakistan, dark innuendoes were aired about Pakistan being a safe haven for drug smuggling and money laundering. Suddenly, one of the finest bastions of financial integrity in the Third World, the State Bank of Pakistan (SBP), found itself in a hapless position due to the ill-conceived, immature and naive wording of the advertisement. A high level delegation led by one of the Deputy Governors of SBP, Mr Sibghatullah, has now left for the States for a belated attempt at damage control.
Before analysing the facts and attempting to cut through the obvious mess-up, one must study the events that led to this international embarrassment. The foreign debt situation as it existed in June 1991 was composed of US$ 15.9 billion foreign debt, either public or publicly guaranteed medium and long-term, disbursed and outstanding. Short-term debt, particularly acquired in the last two/three years amounted to about US$ 4 billion, bringing the debt figure up to US$ 20 billion approximately. Debt servicing was estimated at US$ 1395 million per annum. Given all these astronomical figures, we still remain far behind India and Indonesia who owe more than US$ 50 billion each. Moreover there are enough indicators still on the positive side to ensure that we do not fall within the category of the “severely indebted”.
The “severely indebted” are those countries that are on the wrong side of certain key statistics. According to a working paper entitled “How did the Asian Countries avoid the Debt Crisis?” by Ishrat Hussain writing for the International Economics Department of the World Bank, at least three of the four key ratios described must be above critical limits for there to be reason for alarm i.e (1) debt to GNP must be above 50% (2) debt to exports of goods and services must be above 275%, (3) scheduled debt services to exports must be above 30% and (4) the accrued interest in relation to exports ratio should be above 20%. Looking at these statistics vis-a-vis Pakistan one finds that (1) the percent of our debt to GNP is less than 50% (2) debt in relation to export of goods and services is about 200% i.e. our total earnings are about US$ 10 billion in contrast to our total debt of about US$ 20 billion i.e. less than the critical 275% (3) our scheduled debt servicing is about US$ 1395 million i.e. about 22% of our exports, much less than 30% of our debt servicing in relation to exports and (4) accrued interest is about US$ 629 million or about 12%, which is considerably less than the 20% threshold. These indicators serve to confirm that we are nowhere near being “severely indebted” as per world financial parameters, in fact in relation to other developing countries of the Third World, these serve to indicate a relatively strong economic performance. However, we have been adversely affected since July 1991 as we are going through a sustained transition period because of the reforms enacted by the present Government of Pakistan (GoP) and there is a marked decline in the positive economic indicators since then.
The state of transition has brought the external finances sector under severe pressure and this was to be expected. Nawaz Sharif has repeatedly used flamboyant rhetoric in describing his attempts for self-reliance in the face of credible alternatives to foreign aid, particularly US AID. GoP needs money badly to substantiate its ongoing development programme and had not made alternate arrangements. The long-term assumptions were that (1) there would be an increased inflow of resources, direct investment because of the structural liberalization of the economy (2) there would be a rapid expansion of exports and (3) investments in the domestic market by our expatriates abroad would increase. During the transition period, none of this has happened in any substantive manner. The foreign investment has definitely shown an increase but not enough to replace foreign aid, the imports have increased by 24%, almost double the expansion in exports pegged at 12% Pakistanis are sending money home but this is a substitution largely from the previous “Hundi” system to government bonds, Foreign Exchange Bearer Certificates etc. The confidence of potential investors remains uncertain because of the law and order problems, political uncertainty and resistance by low level functionaries of GoP to the reforms carried out by politicians since they used to rely heavily on the money squeezed illegally from the bureaucratic system. All these have worked to cause a relative foreign currency crunch in sustaining development as well as meeting current budgetary needs. Given the shortfall, someone in GoP related the success in transforming to liberalization to that of acquiring short term money and thought up this scheme. On the face of evidence at hand, it was pretty much above board, given the wording of the advertisement it amounted to being crazy.
One must clearly separate fact from fiction here. The invitation to bid for FCBC may have been made in the advertisement by the SBP and given the government decision, the SBP may have been consulted at the technical level, but the fiasco seems to be originated at the Ministry of Finance, and one daresays, even one step higher, at the PM’s Secretariat. There is a genuine naivete in this performance that precludes it being an SBP operation. The SBP is only working as a banker to the Government of Pakistan (GoP), serving as a borrowing agent of SBP in accordance with the government’s policy. It is the government that makes final decisions about such things as the (1) rates at which to borrow (2) amounts to borrow (3) terms and conditions at which to borrow. In this case little is left for the SBP to contribute, in fact for all practical purposes SBP is just receiving instructions to carry out decisions made by the PM and conveyed through the Ministry of Finance (MoF). One does not believe for an instant that in a matter of such importance, the PM himself did not look at the advertisements before they were placed.
There were other options available, prime being the request for debt scheduling to the international monetary institutions. One could have also gone in for syndicated loans arranged by international banks, given our success in this respect previously this was the obvious route. In going to the international market one could have taken advice from the Pakistani missions abroad or the Pakistani expatriate community, a large number of whom are successful bankers, this was particularly true because of the BCCI scandal and the bad image created in the international and US media. One could have even learnt from the Indian experience in confining invitations to invest in bonds only to those newspapers read by Indian expatriates abroad. One should have been extremely careful in running afoul of the Jewish lobby, even the incumbent US President is in trouble in the media (and as such in the current US Presidential campaign) because of his stance linking US guarantees to loans for Israeli housing to Israeli intransigence in insisting on opening new settlements in the Occupied Territories.
Unfortunately for the credibility of the SBP, they are being victimised because of the novices in GoP who got carried away with the promise of their reforms, subsequently hitting panic stations at the poor performance in the transition period and thus embroiling Pakistan in another unseemly international scandal. With raids being carried out on Pakistani banks in the US, there is bound to be adverse depositor reaction and performance of our bank’s branches abroad will be negatively affected. With certain members of the US Congress, cheered on by Jewish Lobby, baying for Pakistani blood, we are in for a period of sustained censure. It may not mean financial apocalypse but will affect our future plans.
Accountability is the weakest link in our structural fabric, no decision maker is going to be brought to task for the advertisement blunder, probably some low-level functionaries will take the rap. Everybody will then hunker down and hope that this blows over soon. But here a fundamental question arises about credibility of those in power as well as their capacity to make correct decisions. Certainly we are in for devaluation by a rupee or so against the US Dollar, if that is so, the consequences will be relatively less painful than that we thought imminent in the first aftermath of the advertisement blunder, the total ostracisation of Pakistani financial institutions internationally. Given our penchant to avoid responsibility, we should expect more of the same till the next blunder.
On the bright side, there has been considerable domestic investment and the imports that have increased are mainly of machinery instead of consumer goods. There are some solid indicators here but does Nawaz Sharif have the staying power politically?
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