Daily Times

The recent auction (half auction to be precise) of Euro bonds by Pakistan is indicative of the vulnerabilities of the economy managed by the current Nawaz regime and its team of ‘experienced’ economic czars. That the auction for 10-year bonds was undersold by 50 percent at an astronomical interest rate of 8.25 percent itself says a lot about a vulnerable economy that has interest rates amongst the highest in sovereigns. It is the same rate the country got for 10-year bonds a year earlier. At least then it managed to have a full subscription of its bond issue. The five-year maturity bond was sold then for 7.25 percent. This is approximately 650 basis points (BP) above the five-year US treasury yield when the treasuries in the US have historical lower yields. To put things in perspective, when Pakistan first entered international bond markets in 1994, the yield it got was 385 BP above the five-year US treasury yield. That was a time when the economy was small and less globally integrated than it is now and, ironically, the era has been dubbed as the lost decade. After the dollar account freeze mess up of the second Nawaz regime, the 2003-2004 issues carried the same (300-400 BP) premium over the five-year US yield. This itself highlights the weak state of the economy where the government has to pay very high interest rates to attract debt financing. Then there are worrying reports that around 80 percent of the latest subscription has been bought by foreign entities of local banks to avoid the government the embarrassment of a debt issue failure.

Apart from the fact that the country could not attract enough international buyers for its debt even at a significantly higher interest rate, there is the concern of balance of payments going forward. For one, the country will have to pay this high interest year after year on these bonds. Secondly, domestic borrowing has been sky rocketing and the bulk of it is coming from local banks that, on one hand, are making the banking business effortlessly lucrative because of spread on treasury yield over average deposit cost and, on the other, leave little funds for financing of enterprise. Thirdly, there are these dollar denominated liabilities piling up in the form of capacity payments in the energy and infrastructure sectors on projects that are unfeasible and have bad return on investments (ROIs). All this bodes ill for the Pakistani economy in the years ahead and the country faces the risk of default on its international commitments.

On top of that, the Middle East situation puts at risk the country’s biggest source of remittance inflows. And if that is not enough the policies of the current regime, especially its desire to hold the value of the rupee against the US dollar and increase indirect taxes, has made exports costly and less competitive. The economy is running on the sale of profitable public ventures and piling up of debt at astronomical interest rates; this cannot be sustained for long.

What the Nawaz regime fails to realise is that unrealistic and low ROI mega projects can befool the media and through it to urban constituency in the short-term but they cannot befool the capital markets, and neither the international media focused public relations’ charm will. Fixing and running the economy requires tough, long-term decision that the economic team of the PML-N has always been incapable of. The only route out for Pakistan is to enhance the export of goods, services and manpower. Pakistan’s exports accounted for 11.5 percent of the GDP in 1999-2000. This declined to 10.8 percent by 2006 to pick up again and touch 11.8 percent in 2011-2012. But if the statistics of last year are to be believed (and that is because there are accusations of statistical fudging on the present government as well), the exports now account for 9.3 percent of GDP, the lowest in last two decades. Lowering of exports also highlights the lowering of economic productivity as the two are directly correlated. The artificially low exchange rate is also encouraging imported goods’ consumption and this is leading to long-term strains on the country’s balance of payments.

What Mr Sharif and his regime are running is a PR show that many in the media are buying and propagating. Because of an artificially weaker dollar, consumption for urban classes seems all hunky dory. And because of lack of productive assets and urban-centric low ROI infrastructure projects the real estate prices are bubbling up. All this calm and gloss is covering an economic time bomb whose explosion will have for the country consequences similar to those Greece has faced. When Nawaz Sharif came to power, his opponents claimed that he had been brought in by international backers to squeeze Pakistan from all ends to the point of break up. I, of course, never bought this and do not buy it even now. But, unintentionally, through its lack of capability and ineptness, his regime is taking us to complete destruction.

The author can be reached on twitter at @aalimalik