Economic viability of the Issuance of Euro-Bonds

In The Perspective of

Debt Crisis of Pakistan

Talha Aziz Khan 1

Table of Contents:

1. Introduction

2. Debt crisis of Pakistan in historical perspective

2.1 Debt problem in the pre-1999-00 period
2.2 Debt problem in the post-1999-00 period

3. IMF and the impact of its conditionalities

3.1 Trade Liberalization
3.2 Budget deficit
3.3 Devaluation
3.4 Social cost of the IMF policies
3.5 SBA and PRGF

4. Issuance of euro-bonds

5. Economic viability of the issuance of euro-bonds: a critical analysis

5.1 Analysis in the macroeconomic framework
5.1.1 Exports and imports
5.1.2 Depreciation of Currency (US dollar and rupee)
5.1.3 Remittances
5.1.4 FDI and domestic stability
5.1.5 Matter of Sovereignty
5.1.6 High cost of debt
5.2 Euro-bonds or the IMF’s PRGF?

6. Conclusion

Talha Aziz Khan 2

 1. Introduction

Recently, Pakistan staged re-entry into the international capital markets. It issued
euro-bonds worth US$500 million. First such venture after the debt crisis of the 1990s,
issuance of the euro-bonds has been termed as a great success by the economic
managers of the country. It is claimed to be a strategic move with multiple
objectives such as, to market the economic recovery of the country, attract
foreign direct investment, set up a monitoring system driven by external market
forces, and diversify sources of borrowing. Above all, it is also projected as a move
to end reliance on the International Monetary Fund (hereinafter: IMF).

The objective of ending reliance on the IMF is praiseworthy, especially by a

country having a long history of dependence. The same is true of the other
expressed objectives. However, when examined in the context of the debt crisis of
the 1990s and the available alternative, this economic move raises eyebrows.

The period comprising ten years of 1990s is termed as a ‘lost decade’ in the
economic history of the country. Having grown at an average rate of 6.5% in the
80s, the economy tumbled down during 90s to an average GDP growth rate of
almost 4.5%. Together with economic recession, it suffered large current and fiscal
deficits for a variety of reasons. This gave rise to a vicious circle of increased
borrowing and rising public debt stock, both domestic and external. Towards the
end of the 1990s, the situation aggravated to such an extent that the debt
servicing exceeded beyond sustainable limits. The debt sustainability indicators
turned worse not only visa-vis regional countries but also some highly Indebted
Poor Countries (hereinafter: HIPC). Pakistan was on the verge of default.

However, in the post-2000 period, Pakistan has been able to break the vicious
circle of debt. All the macro-economic indicators have improved. This is partly due
to the commendable economic management, together with rescheduling of
foreign debt. It has provided necessary ‘fiscal space’ to the economic managers
of the country. However, the fundamental flaws in the economy, such as narrow
export base, reliance on agriculture sector are still unattended.

Against this backdrop, this paper critically examines the stated objectives and
economic viability of issuance of the euro-bonds. This is done in the light of the
recent debt crisis, economic vulnerabilities and the alternative of IMF funding.

Considering the above mentioned facts, this paper has been divided into 5 main
parts. The second part highlights the magnitude of the debt crisis of the 1990s and
discusses the factors responsible for it. The third part deals with the role of the IMF
conditionalities in the debt crisis and the funding programmes. The fourth part sets
out features of the recently issued euro-bonds and the stated official objectives.

The fifth part critically examines whether, economically, issuance of euro-bonds is

a sound move. Therefore, it has been discussed in the light of the vulnerabilities of
the economy- macroeconomic framework- and the sustainability of the important
factors which lead to economic turnaround in the post 2000 period. Special

Talha Aziz Khan 3

analysis has been done as to whether the issuance of the bonds is a better option
than the IMF’s PRGF at this juncture in the economic history of the country.

2. Debt crisis of Pakistan in historical perspective1

In order to critically examine the economic soundness of the issuance of the euro
bonds at a high interest rate vis-à-vis the concessional IMF funding in the context of
the debt burden, it would be greatly helpful to discuss the debt crisis of the 90s.

Pakistan has been facing high debt problem since 1980. It became worse during
the 1990s and reached a crisis point towards its end. However, in the post 99-00
period Pakistan has not only been successful in averting crisis, it has performed
remarkably well in debt management. Much to the surprise of the international
watchdogs, it has improved both the stock and the flow ratios of the debt (the
former dealing with the quantum of debt and the latter with the debt servicing).

2.1 Debt Problem in the Pre-1999-00 period

During the 90s, Pakistan was in a debt trap owing to unsustainable cost of debt
servicing. It is because of the debt problem, the period of 1990s is considered a
‘lost decade’ in the history of economic management of Pakistan. It is noteworthy
that both the internal and external components of the public debt reached
unsustainable levels; however, position of the external debt and servicing thereof,
became more alarming.

*Debt figures in Rupee(billions)(Pakistani currency)

**Source2

1
The debt stock or debt refers to the public debt. It is because, it was the public debt( sovereign debt) which led to the
crisis.
2
Government of Pakistan, A Debt Burden Reduction and Management Strategy (Summary Report)
Ministry of finance [table2, p11] <http://www.finance.org.pk/other/main.htm>at 25 November
2004. In view of the tabular analysis, the public debt grew by nearly 100% from 1980 to 1990, 1350%
from 1990 to 1996. Unfortunately, this growth in public debt far exceeded the growth in revenues.
Doing a simple analysis, the public debt grew by more than 1900% during the two decades while
the revenues registered growth of only 111% during the same period.

Talha Aziz Khan 4

 To highlight the gravity of the issue, the public debt to GDP ratio jumped from
66.3% in 1980 to 100.7% during 2000. The public debt to revenue3 ratio jumped
from 403.5% during 1980 to 609.5% during 2000. Worse was the debt servicing to
revenue ratio which increased from 19.6% to 60.3% during the same period. It
shows that almost 2/3rd of the national revenues were consumed by debt
servicing. If defence expenditure of RS150.4billion4 is taken into account, the ratio
comes to 77.5%,5 leaving government with only 22.5% of the revenues to carrying
out remaining budgetary activities. It shows that the other expenditures would
have been met through borrowed money.

This quantum of debt was also excessive and unsustainable in view of the
comparison with other developing countries. For example, Pakistan recorded debt
to GDP ratio of 102% during 1999 as against 91.1% in case of Srilanka and 47% in
case of India during the same period.6

Even more problematic was the external debt burden which set in a vicious circle.
It increased dependence on the foreign loans for rising foreign debt servicing. The
matters aggravated as the country failed to generate enough foreign exchange.

A country heads towards a debt trap when, among other things, export growth
rate could not keep pace with that of the debt; another possibility is the widening
trade imbalance or negative balance of payments. Unfortunately, Pakistan’s
external debt not only registered high growth rate in absolute terms,it also
increased as a % age of the GDP and foreign exchange earnings. For example,
the foreign debt (including foreign exchange liabilities)7 as % age of GDP
increased from 41.5% during 1980 to an alarming figure of 69.7% during 1998.8 To
highlight the gravity of the problem, the debt service to foreign exchange earning
ratio increased from 18.3% during 1980s to as high as 41.4 % during 1998. It shows
that significant portion of the foreign exchange earnings was consumed by debt
obligations during the year, leaving little for the imports and other foreign
exchange liabilities.

External debt comparison with other countries would be illustrative. In 1998, Net
present value of external debt as %age of GDP was 44% as against 20% of India
and 23% of Bangladesh. It seems to be the highest in the region. Similarly, debt
servicing as %age of GNP was 7.5% as against2.8% of India and 1.5% of
Bangladesh. This is also the highest in the region.9

2.2 Debt Problem in the Post-1999-00 scenario

3 It includes both tax and non-tax revenues receipts.

4 Defense expenditure for 2000. See Government of Pakistan, Annual Report 2000 State Bank of
Pakistan <http://www.sbp.org.pk/reports/annual/arFY00/Fiscal_revised.doc> at 26 November 2004.
5 Ibid, [table IV, 51]. Ratio calculated by the author on the basis of figures mentioned in the table.
6 Above n 2, 12 [ Table 3]
7 Ibid.
8 Ibid, 9-10 [table1].
9 Ibid, 13 [table4].

Talha Aziz Khan 5

From 1999-2001, in order to avoid default on debt servicing, the successive
governments took steps to avoid it. Firstly, in January 1999 Pakistan successfully
negotiated a debt rescheduling agreement with the Paris club on ‘Houston
Terms’.10 It rescheduled both the principal and the interest payments amounting to
US$3.3billion.11

Secondly, required by the ‘comparability of treatment provision’ in the

rescheduling agreement with the Paris Club, Pakistan got rescheduled obligations
in respect of the three euro bonds.12Thirdly, in the same year, Pakistan got
restructured debt worth $415m due to commercial banks. In addition, to this, short
and medium term liabilities of US$300m were also rescheduled by other
international donors.

Last but equally important is the second debt rescheduling agreement with the
Paris Club.13The rescheduling applied to entire debt stock of $US12.5billion.14

In order to devise a permanent solution, the economic managers formulated a

debt management strategy (hereinafter: DMS). It was acknowledged that debt
reduction is directly linked to economic growth. It was targeted to simultaneously
achieve both the debt reduction and economic growth. The DMS included two
bench marks; First, The GDP growth rate of 5.5.% to be achieved by financial year
2003-04; second, quantum of debt to be slashed by 25-30% till 2004. The DMS
included the following goals:15

• Revival of economy;
• Enhancement in debt carrying capacity mainly by enhancing exports,
remittances, and revenues;
• Reduction in the twin deficits: fiscal and current account ;
• Reduction of losses of State owned enterprises;
• Reducing the cost of borrowing, both domestic and external. Hence it was
decided to slash the high interest rates on various saving schemes operated by
the state-owned financial institutions. Contracting external loans bearing low
interest rates;

10 See Paris club,

<http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B02WP05> at 3
December 2004. Also see, Ishrat Hussain(Governor State Bank of Pakistan) ,Strategy for external
debt management1999-2004 State Bank of Pakistan www.sbp.org.pk at 4 december 2004.
11 The ODA part of the publicly guaranteed debt was rescheduled for 20years with 10 years grace

period; the non-ODA part was rescheduled for 18 years with 3 years grace period.
12 Totalling US$ 610 million, these were issued in 1990s and were the first entry of Pakistan in the

international capital markets. The terms of the payment provided for 3 years grace period, 6 years
maturity and 10% interest rate.
13 Paris Club, Press release (December 13 2000) <http://www.parisclub.org> at 1 December 2004. As

per the press release, ODA loans were rescheduled for 38 years with 15 years of grace period; non-
ODA loans were agreed to be paid over 23 years with 5 years grace period
14 See, Ishrat Hussain(Governor State Bank of Pakistan ,Strategy for external debt management1999-

2004 State Bank of Pakistan <www.sbp.org.pk> at 4 December 2004.

15 Above n2, 28-41.

Talha Aziz Khan 6

• Accelerated privation of State-owned enterprises and application of the
proceeds for debt retirement. In this regard privatization Ordinance 2000 was
promulgated.16
• Creating propitious environment for foreign direct investment;
• Taking measures for controlling the flight of capital;
• Efficient, transparent and productive use of funds;
• Effective debt monitoring system.

As result of the measures taken by the government, macroeconomic indicators

improved significantly by the end of financial year 2003-2004.

It is commendable that the GDP grew by 6.4% during financial year 2003-04 as
against the benchmark of 5.5% in the DMS report. External debt and liabilities
reduced to $35.864 billion by end march-2004, showing a decline of
US$2.072billions since 1999. More commendable is the foreign exchange reserves
of US$12.4billions17. It is unprecedented in the economic history of the country. If
this liquidity is taken into account, the net foreign debt is almost US$25billion. As
%age of GDP, the debt servicing reduced from 66% to 25% which has surpassed
the targeted reduction of 25-30% in the DMS report. The trade imbalance slashed
to 0.6% of the GDP.18 Another important step undertaken by the government is
earlier payment of expensive debt to the Asian Development Bank on January29,
2004. These loans were contracted at high interest rates ranging from 6.3% to 11%.
The government also intends to repay other expensive debts over the coming
couple of years. This is indicative of the economic recovery.19

3. IMF and the impact of its conditionalities

Pakistan Joined the IMF on July 11, 1950.20 Due to initials problems and chequered
politico-economic history, Pakistan has long dependence on this institution. During
the 1990s, Pakistan signed 8 agreements with the IMF.21 These included SAF, EFF
and ESAF.22 The ESAF was a concessional loan facility for balance of payments
problems bearing interest rate of 0.5%; EFF was an expensive loan arrangement
bearing interest rate of 4.2%.23

16 cf, above n14, P12: ‘But I am not yet sure how this amount[privatization proceeds] will in fact
accrue and hence I consider it safe to exclude these proceeds from the calculation of debt stock
reduction’.
17 Economic survey, Overview of economy.
18 Ishrat Hussain, Why Pakistan Should exit the IMF programme State Bank of
Pakistan<http://www.sbp.org> at4 December 2004.
19 The economic recovery is best described by the recent remarks of the deputy managing director

of the IMF,Agustín Carstens(IMF, Press Release no. 4/259(December 1, 2004 <)www.imf.org> at 5

December 2004.:
During Pakistan's three-year arrangement under the Poverty Reduction and Growth Facility
(PRGF), the country has made a strong recovery from the economic crisis of the late 1990s...
External support has played a part in Pakistan's recovery, but the turnaround has been
primarily due to the implementation of strongly owned government policies.
20 See IMF, Pakistan and the IMF<www.imf.org>
21 Above n18, 8 [annex1].
22 SAF(Structural Adjustment Facility); EFF(Enhanced Fund Facility); ESAF(Enhanced Structural

Adjustment Facility).
23 IMF, Press Release no. 197/48 (October 20, 1997) <www.imf.org> at 2 December 2004.

Talha Aziz Khan 7

All the loan agreements have almost the same set of conditions attached with
them. These conditions were used to further the IMF’s policy objectives of trade
liberalization, privatization and deregulation. The conditions included reduction in
budget deficit, liberalization of the currency market, lowering of customs duties,
imposition and widening of general sales tax, lowering of income tax rates and
broadening of tax base, increase in exports through devaluation, reduction in
debt stock, and increase in the prices of public utilities such as, telephone, gas
and electricity. In addition to these, it was also made mandatory to reduce
subsidies on essential items such as wheat, which is the staple food in the country.

Meeting IMF conditionalities has always been a tough political decision as these
directly or indirectly affected the budget of a common man.24 It was common to
increase the prices of the utilities, increase tax rates, widen tax base, undertake
devaluation before the arrival of the IMF mission in order to get the loan
sanctioned.25

As already mentioned above, all of the IMF conditions affected the economy and
consequently a common man. Some conditions were also contradictory to the
broader policy objectives of the IMF which need to be discussed. However, it
would be better, keeping in view the length of the paper, to limit the discussion to
conditions, namely, trade liberalization, devaluation and curtailment of budget
deficits.

3.1Trade Liberalization

During the 1990s IMF has been pursuing the agenda of trade liberalization by
reducing both tariff and non-tariff barriers. The explanation was to bring
competition in the domestic economy and give role to the market forces.
Therefore, under successive agreements with the IMF, Pakistan slashed the
maximum tariff from 225% in 1998 to 35% in 1998-99. This means reduction of almost
85% over a period of 10 years. This lowering of the customs duties badly affected
the local industry. It is because the reduction seemed to have been done not as
part of an integrated program which should have created propitious domestic
environment before lowering of the duties. Large scale manufacturing sector was
hit hardest. It registered negative growth rate. Moreover, there was maximum loan

24
Pakistan Economist, Pakistan bows to IMF Pressure(1999)34
http://www.pakistaneconomist.com/issue1999/issue34/f&m.htm at December 7 2004.
Pakistan after some initial resistance is bowing to the pressure of IMF and giving in on almost
all the points one by one. As was feared and reported in page (9-15 Aug. 99), Prime Minister
has also given in and GST has been imposed on many items besides gas, electricity and
petroleum. Prime Minister was initially unwilling to take these steps which would unleash
another wave of price hike. He was of the view that he could not do so for political reasons.
Also see, Dawn, IMF conditionalities lead to 'coercive relationship' (2001)
<http://www.dawn.com/2001/09/08/ebr8.htm> at December 7 2004.
25Ibid. Also see Heather D Gibson, International Finance: Exchange Rates and Financial Flows in
the International System (1996) 322. It talks about preconditions. Devaluation is one of the
preconditions and is not included in the agreement.

Talha Aziz Khan 8

default in this sector. There were about 4000 sick industrial units and 28% of the
non-performing loans (Rs.263billion) owed by this sector.26 The obvious and the
immediate impact of this policy was reduction in GDP, recession in economy,
inflation and above all unemployment.27 This also badly affected the revenues
which in turn in rising budget deficit (discussed below).

3.2 Budget deficit

During 90s Pakistan maintained high budget deficits. In order to make up for the
short fall in revenues, successive governments had to resort to borrowings, both
external and internal. The borrowings had to be contracted at high interest rates.
The reason being the weak financial position and political uncertainty in case of
external borrowings; In case of domestic borrowing, it was the liberalization of the
interest rates, as part of agreement with the donors. To make the matters worse,
IMF required the lowering of the tariff rates. Important to mention that trade taxes
have been the main source of revenue for Pakistan. For example, at the start of
1990, custom duties accounted for 5% of the GDP while it dropped to 2.2% in 1998-
99. The shortfall in customs duties was also reflected in the tax revenues which was
14% in 1989-90 and dropped to 13.3%.28 Granted that the short fall was tried to be
filled by the GST, the revenue generated by this source did not meet the targets.
The GST being regressive in nature also affected the cost of living of a common
man. Moreover, it has never been accepted by the trading community due to
various reasons, such as documentation. That is why it has always been
problematic to enforce it at the retail level.

Hence shortfall in taxes directly affected the budget deficits and debt stock. This
shows inherent contradiction in the IMF conditionalities.

3.3 Devaluation

Devaluation has been the major condition of the IMF during the 1990s. In a
theoretical model, it fits well. In a simple economy, there is no doubt that
devaluation of a currency brings down the prices of exports in real terms. Hence, it
must result in increased foreign exchange earnings of a country which ,in turn ,
positively affects balance of trade and current account. However, in a real world
where the economy is driven by complex set of relations between numerous
known and unknown variables, badly-thought-out devaluation may be
counterproductive.29

Pakistan is a classic example in this respect. It seems that neither the IMF nor the
economic managers of the country showed any insight into the dynamics of the
local economy. The devaluation resorted to during the 90s, badly impinged upon

26
Below n24, p9.
27
Tilat Anwar, Unsustainable debt burden and poverty in Pakistan: a case study for enhancing
HIPC initiative,[Table8, p26].
28
Ibid,[ table6, p24].
29
See,eg, Heather D Gibson, International Finance: Exchange Rates and Financial Flows in the
International System( Longman Group Limited 1996)pp332-333.

Talha Aziz Khan 9

the economy and the standard of living in many ways. Ironically, reduction of
external debt and liabilities was the corner stone of the IMF packages. However,
frequent devaluation increased the rupee value of the foreign debt and
consequently debt servicing. For example, from 1995-96 to 99-00, external debt
grew by 57% in rupee terms as against 12% in US dollar terms.30

As all the variables are interlinked, increase in the cost of debt servicing increased
budget deficit. Interestingly, this, in turn, pressed the government for more
borrowing, setting in a vicious circle of ‘four deadly Ds’: devaluation, (rising) debt
servicing,(rising) external debt stock and (rising) budget deficit.

Another negative affect of devaluation, is the expensive imports. Exports of

Pakistan are primarily import dependent. Capital goods, machinery and raw
materials account for the major chunk of the import bill. Moreover, Pakistan meets
its fuel demand through import. Considering these facts, the devaluation is bound
to increase the cost of production. This renders exports expensive and
uncompetitive in the international market.31

In substantiation of the counter-productivity of devaluation, it is noteworthy that

the exports remained stagnant from 1994-95 to 199-00; rather during 1998-99 it
dropped down to US$7570millions.32

Equally important point is the stagnation of imports during the same period. In
effect, the imports also registered sharp decline to US$9.344billions during 1998-99.
It shows the direct dependence of exports on imports. It should not be a surprise
that the manufacturing grew at an average rate of only 3.9% during 1990s as
against enviable growth rate of 8.2% during the 1980s.33

Lastly, the stagnation of imports also affected the revenue collection from customs
duties, which were already being slashed, and the collection of sales tax at the
import stage.

30
Tilat Anwar, Unsustainable debt burden and poverty in Pakistan: a case study for enhancing
HIPC initiative, p4. Tilat Anwar concludes that burden became unsustainable resulting in
rescheduling in 1998-99:
The external debt which has surpassed the domestic debt in 1995-96, increased rapidly by
Rs 560.8 billion or 57 percent to Rs1536.7 billion between 1995-96 and 1999-00. While external
debt in dollar term grew by 12 percent, the phenomenal growth of 57% in rupee term was
attributed to 11 percent average annual depreciation of rupee against US dollar
demanded by the IMF to enhance exports over the last five years. While exports remained
stagnant, debt burden became unsustainable resulting in rescheduling in 1998-99.

31 Above n23 [8]. Anwar has noted that:

This erodes the anticipated gain in the competitiveness of exports, again calling for another
devaluation to improve the export competitiveness. Thus, each episode of devaluation has
ensued inflation in Pakistan and vicious circle of devaluation and inflation…’
Also see Prof. Khurshid Ahmed( former Senator and Chairman Institute of Policy Studies, Islamabad),
Pakistan Economy: External Sector Crisis, [29]
32
Ibid, [table5, p23].
33
Ibid, [table8, p26].

Talha Aziz Khan 10

The above analysis brings in to sharp relief that there were inconsistencies in the
policy tools of the IMF. Although the economic managers of the country are
equally responsible, the IMF has its own share of blame.

3.4 Social Cost of the IMF policies

In order to achieve the IMF budgetary deficit targets, the successive governments,
among other things, slashed development expenditures. For example, as %age of
GDP, development expenditure was 7.9% during 1980-85 but slashed to 4.3%
during 1995-99 and 3% in 1999-00.34

The social cost of economic mismanagement and the IMF policies was
tremendous. For example, Per capita income growth rate fell to average of 1.4%
during 1990s as against 2.4% during the 1980s; inflation grew at an average rate of
9.7% during 1990s as against 7.3% during 1980s. Even worse, unemployment grew
by 6.1% in the second half of 1990s. The average unemployment growth rate
during 1990 increased to 5.7% as against 3.5% during the 1980s, showing the loss of
what had been achieved during the 1980s.35. Consequently, the burden fell on the
common man. This also led to sharp rise in poverty which rose to 32.6 in 1998-99 as
against 17.32 in 1987-88.36

3.5 SBA and PRGF

In order to resolve the debt crisis, Pakistan was confronted with two choices, either
to default with horrible consequences or to negotiate a workable solution with the
debtors, especially international financial institutions.37 Opting for the second
course, Pakistan negotiated a stand-by agreement (the IMF refused to negotiate a
full ESAF/EFF program) for a short period of 10 months. Pakistan contracted the
agreement despite excessively harsh conditionalities infringing the economic
sovereignty of the country. The main reasons38 for signing it were:

• Immediate injection of foreign exchange to sustain balance of payments;

• To negotiate favourable debt rescheduling form international donors,
especially Paris club.

The SBA-agreement had numerous conditionalities with far-reaching social,

economic and political fall-outs. Equally tough were steps taken by the
government prior to the finalization of the agreement in order to win favour with
the Fund. The conditinalities,39 both implemented before and after the signing of
the agreement, were the almost the same as during the1990s. These broadly
included:

34
Above n1 [table7, p16].
35
Anwar [table8, p26].
36
Anwar [7, p25]
37
above n1, pp59-67.
38See Ishrat Hussain,Why Pakistan Should exit the IMF programme, p3.
39 Memorandum of Economic and Financial policies,2000-2001, [7,10,12]; Pakistan Letter of
Intent, Memorandum of Economic policies and Technical memorandum of understanding,
November 4, 2000, pp21-27.
Talha Aziz Khan 11
 • Real GDP growth of 4.5%;
• Reducing budget deficit to 5.2% of the GDP.
• Free exchange rate
• Devaluation of rupee against US dollar;
• Announcement of trade liberalization slashing down maximum tariff rate
from 30% to 25%;
• Quarterly petroleum price adjustment;
• No new GST exemptions;
• Promulgation of New Income Tax ordinance;
• Extension of GST to fertilizers, pesticides and other agricultural inputs;
• Extension of GST to the retail level;
• Elimination of interest rate subsidy in exp[ort finance

Pakistan fully implemented this programme. Successful completion of this

programme led to signing of Poverty Reduction and Growth Facility(hereinafter:
PRGF) in 2001. The perusal of the Letter of intent dated November 22, 2001 shows
that the conditions were principally the same relating to budget deficit,
accounting standards, revenue reform and revenue targets etc. It was affirmation
of the continuation of the policies initiated under the SBA. However, it should be
noted that there was no stipulation as to devaluation of currency; it was, perhaps,
due to the aftermath of 9/11 which stabilized the local currency against US dollar.

4 Issuance of Eurobonds

Pakistan made its first entry into the capital markets in the 1990s. It issued three
euro-bonds in the international capital markets. These were of different
denominations, maturity periods and interest rates.40. The issuance of all the three
bonds of this series was necessitated by the debt problems. However, these, in
turn, exacerbated the debt crisis due to the ever-increasing debt servicing cost.
Hence, in line with the DMS, Pakistan swapped them with a single bond due in
2005.41

Pakistan issued its first euro-bond of the 21st century on February 12, 2004.42 The
euro bond has face value of US$500 million with maturity in 2009. It is 370 basis
points above the comparable US Treasury bond which had interest of 3.046% at

40
The first one of this series was 150million dollars with interest rate of 11.5% and maturity in
December 1999 was issued on 12-22-1994; the second one was 160million dollars at 6% convertible
note and maturity of 26-2-2002 and put option in February 2000, was due issued on 26-2-1997; and
the last of this series and before the crunch point was 300million dollars at 3.95% libor plus with
maturity on 30-05-2000 was issued on 30-05-1997
41 The rescheduling of the euro bonds was also necessitated by the ‘comparable treatment’

clause of the rescheduling agreement with the Paris Club. These were swapped with a single
bond of 585million dollars amortizing bond. The new euro bond was to have a maturity of six
years with three years grace period and 10% coupon rate. See, Federico Sturzenegger
(Business School, Universidad Torcuato Di Tella)
,Default episodes in the 1990s:Factbook and preliminary lessons, 2002 , 45. Also see, Federico
Sturzenegger and Jeromin Zettelmeyer, Haircuts, (21) at http://scid.stanford.edu/events/2004-
5%20lunch%20papars/fsturzenegger.pdf. It discusses the ‘haircut’ on the rescheduled bonds.
42
This is the fourth euro-bond in the economic history of the country.

Talha Aziz Khan 12

the time of launching of this bond. In simple words the offered interest rate is 6.75%.
The lead of the bond was managed by JP Morgan and ABN Amro Bank. The
official sources in Pakistan claim it a successful and encouraging experience. They
argue that the applications received were four times more than the value of the
bonds. Simultaneously, the government has decided not to contract any new loan
agreement with the IMF.

The economic managers have termed the issuance of euro bonds a strategic
move with multiple objectives:43

• It will help diversify sources of funding from IFIs (International Financial

Institutions) to capital markets;
• It is argued that it was necessary to stage re-entry in the international capital
market; Borrowing in itself is not an objective; The economic managers
reckon it important to restore the confidence of the international
community, especially the foreign investors to invest in Pakistan. It will
enhance the credit rating of the economy by Standard & Poor’s and
Moody’s international. The credit rating is considered a vital yardstick by the
international investors.
• It is argued that this will establish a pricing bench mark for the international
investors;
• Of the 37 countries making use of the IMF’s PRGF, most are economically
unstable. Issuance of bond will help signal the strength of Pakistan’s
economy.
• It will help eliminate dependence on the IMF which in turn will help improve
the image of the country.
• Pakistan issued bond worth 500million dollars in order to be included in the
list of Emerging Market Bond Index. To be included in EMBI, the value of the
bond should not be less than 500 million dollars. The advantage of being
included in the EMBI is that the bond could be traded in the international
bond market which in turn will be the barometer of the economic health of
country;
• It is argued that high level of foreign exchange reserves (US$12.5 billions)
does not eliminate the need for issuance of the bonds. It is argued that euro-
bond has been issued to remain active in the international capital market
for attracting foreign direct investment. The official sources refer to the
issuance of bonds countries such as China, Korea, and Malaysia despite
high level of foreign exchange reserves.
• It is argued that the interest rate offered on the bonds is not high considering
the bonds issued by comparable economies. It is argued that Pakistan has
offered lesser rate of interest than bonds of countries with credit rating better
than Pakistan. They cite Philippine as a case in point. It is argued that
Philippines issued bond with maturity in 2009, with 420 basis points above the
5 years US treasury. On the other hand, Pakistan issued 5 year bonds with 370
bps above5 year US Treasury bond. This is despite the fact that Philippines
rating is better than that of Pakistan.
• The proceeds of the Eurobonds would be used to retire high cost debt.

43 Dr. Ashfaque H Khan, Pakistan’s Euro Bond: A resounding Success www.finance.org.pk

Talha Aziz Khan 13
 • It is argued that Pakistan has achieved the goal of diversification of investors
through diverse offering of the bonds. Of the total 54% bonds were placed in
Europe, 24% in Asia and 11% in offshore US and Middle East. Similarly, the
investors include Fund managers, banks, retail players, hedge funds etc.

5. Economic viability of the Issuance of the bonds: a critical analysis

There is no denying the fact that countries raise capital from the international
capital markets in order to fulfil their funding needs. It is also accepted that a
country should not have any dependence on institutions like IMF which extend
loan with numerous harsh conditionalities. In case of Pakistan these have done
more harm than good. It is also accepted that a country should have
diversification of creditors. It is also accepted that presence in the international
capital market may help improve the shaken confidence of the international
investors. Having acknowledged the importance of the points made by the
economic managers of the country, there is a wealth of questions which need to
be answered before forming any opinion as to the economic viability of the euro-
bonds.

The very first question which arises is whether it is the right time to issue euro bonds
given the recent economic/debt crisis of the country. Secondly, has Pakistan just
made a recovery from the debt trap or has become stable?? Does the debt
rescheduling involves any write off or is it mere a cash flow relief, giving Pakistan
only some ‘fiscal space’ to set its house in order? Above all, Was it prudent to issue
euro-bonds with interest rate as high as 6.75% visa vis IMF PRGF which carries
interest rate as low as 0.5%.

The answer to whether the issuance of the euro bonds is the right step, at this
juncture in the economic history of the country, has to be analysed in the context
of broader macroeconomic framework of the economy.

5.1 Analysis in the macro-economic framework

It is important to analyse the issue in the macroeconomic framework: has the

economy of Pakistan stabilized enough to absorb any exogenous shock? For this
purpose, it is important to analyse the fundamental and structural flaws in the
economy which led to the debt crisis of the 1990s.

5.1.1 Exports and imports

Statistically, the exports have registered some improvement since 1999-00. These
have registered increase of 50% from 1999-00 to 2003-04(from US$8.568 to
US$12.313billions)

Talha Aziz Khan 14

*source44

The export figures are encouraging especially given the fact that it took nearly
10years to increase exports by US4.4 billion dollars during 1990s; while it has
increased by the same quantum during the past 4 years.

But it is important to note that the imports also grew by 51% during the same
period. Equally important is the growth in imports by 27.6% during 2002-03 visa-vis
2001-2002. Admittedly, being import dependent export base, it is a good
sign.45However, the worrisome fact is that the trade gap increased by US$3.2786
billions during 2002-03 as against target of US$700 millions.46 This is the highest figure
since 1996-97.47 Even more alarming is the trade imbalance of the on-going
financial year 2004-05. The trade deficit till November 4,48 2004 is US$1091.1millions
(provisional) as against US$444.7millions49 during the same period of the last
financial year. The abrupt increase in the trade gap to a worrisome level shows
that the country requires more foreign exchange inflows for funding imports or it
has to consume the foreign exchange reserves. This also shows that the country
has yet to achieve any macroeconomic stability which is essential for avoiding any
new debt trap.

Analysis of the composition of exports and imports would also be instructive as to

the macroeconomic stability and the resultant debt paying potential of the
economy.

44 www.sbp.org.pk
45 See Federal Budget 2004-05, Budget Speech of the Finance Minister [13] at www.finance.org.pk
46 Economic Survey 2003-04 www.finance.org.pk
47 Above n1, [table 10, p25].
48
The calculations for 2003-04 made by the author on the basis of the monthly export and import
figures mentionedc in the Economic surver 2003-04 avaialable at www.finance.org.pk. The figures
for 2003-04 include exports/imports for the whole of the November while those for 2004-05 include
only upto November 4, 2004. It is assumed that the trade deficit will remain the same for the whole
month of November.
49
Cumulative imports including the whole of November were US $5280.6Millions while the cumulative exports
including the whole of November were US$4835.9Millions. This gives trade imbalance of US$444.7millions

Talha Aziz Khan 15

The composition of exports shows that major chunk comprises cotton and cotton
products. That is, it is dependent on the performance of the agriculture sector
which is highly vulnerable to the weather conditions. It has limited potential of
growth due to many factors, such as increasing shortage of water, uneducated
farmer, lack of modern farming techniques adulteration in the agriculture inputs.
Also important to not that the exports are highly concentrated in few items. Almost
four items namely, cotton, rice, leather and sports goods account for 75% of the
export earnings.

The export market of Pakistanis is as under:

The tabular analysis of the export markets also brings into sharp relief the limited
nature of the market. Any exogenous shock in USA, UK or Dubai is certain to
impinge on the export targets. The concentration of exports in four items and the
limited market shows the vulnerability of the economy and the macroeconomic
outlook. Any exogenous shock will affect the export revenues which in turn has the
potential of unleashing a new debt trap.

Similar to exports, imports are also highly vulnerable to exogenous shocks. The
imports mainly comprise machinery, petroleum products, raw materials, fertilizer,
edible oil etc.

Talha Aziz Khan 16

The analysis of the composition of the import list shows the inelastic nature thereof.
Any exogenous shock affecting any of the three basic commodities, namely,
machinery, petroleum and chemicals would drastically impinge on the import bill.
This ,in turn, will badly affect the balance of payments. For example, increase in oil
prices in August-2005 is expected to badly affect the trade deficit(discussed
above) which will affect the foreign exchange reserves. As the economy is highly
sensitive, any downward trend in the foreign exchange reserves causes
weakening of the local currency which in turn inflates the import bill.50

The additional funding to absorb any exogenous shock may reignite the debt
crisis.

5.1.2 Depreciation of Currency(US dollar and rupee)

The external debt of Pakistan comprises loans in various currencies; however, it is

expressed in terms of dollar. Consequently, any change in the value of US dollar
against other currencies affects the debt burden. For example the British pound
and Japanese Yen conversion to US dollar for the sample periods is as under:

Currency Conversion Rate in terms of $US

1-07-2001 1-07-2002 1-07-2003 1-07-2004
British 1.41610 1.53280 1.65950 1.81910
Pound
Jap. Yen 0.008016 0.008360 0.008345 0.009187
Source51
This depreciation of US dollar against other currencies increases the external debt
stock. In order to highlight the precariousness of the situation, it is important to
quote from the speech of the Governor state Bank of Pakistan:52
In 2000-01, for example, our stock of debt and liabilities would have been $ 36.3 billion
only if there was no revaluation on account of currency movements. In other words, we
had to pay $ 1.5 billion extra out of our resources not because we borrowed this
additional amount but because the value of the stock went up in terms of US dollars.

50 Mohiuddin Aazim, Booming oil prices to hit forex reserves, August 30,2004
http://www.dawn.com/2004/08/30/ebr4.htm
51 http://www.surinam.net/surinam_business_currency_exchange_rate.php
52 Ishrat Hussain, Strategy for external debt management1999-2004 p4.

Talha Aziz Khan 17

 Although Pakistani currency (rupee), to some extent, has been stable against the
US dollar since 9/11, it has considerably depreciated against the other currencies.
For example the rupee- pound conversion rate was 87.11(selling TT) on 4Jan2002
which has increased to 115.92(selling TT and OD) on 8-12-2004. Similarly, conversion
rates of Japanese yen were 0.4616 and 0.5789 respectively on the same dates.53

This reinforces the trend of dollarization54 of the economy. Moreover, it also badly
affects the trade deficit owing to increase in the cost of imports from these
countries. These, in turn, affect the debt stock.

5.1.3 Remittances

Indubitably, incidence of 9/11 badly affected the economy of Pakistan in terms of

foreign direct investment and exports due to its geo-political position; but there
were two important salutary developments. These played a major role in the
economic turn-around of the country and the consequent debt sustainability. The
first is the bettering of ties with the developed countries. This paved the way for
better relations with the IFIs. Second and the most important development was the
increased flow of foreign remittances. It is noteworthy that the foreign remittances
have always played a significant role in the sustainability of the current
account/balance of payments and resultantly management of foreign debt.55

The flow of the foreign remittances dried up during the 1990s after an average
annual flow of US$3 billions during the 1980s. It is therefore not a coincidence that
the external debt burden increased beyond the debt paying capacity of the
country. It is again no wonder that the debt sustainability achieved during 2000 to
2004 has coincided with the tremendous increase in the remittances. The year-wise
and country-wise stream of the remittances is as under:56

53 www.brecorder.com. Theses are the interbank rates and not the open market rates which

are usually higher than the inter bank rate. The author has used the domestic market
conversion rates instead of international market rates. This is due to the fact that the domestic
market conversion rates are higher than the international market conversion rates due to
higher demand in the local market. Cf rates at
http://www.surinam.net/surinam_business_currency_exchange_rate.php. For example pak rupee-
pond sterling conversion rate was 82.49957 as per Surinam.net(considering these international
market rates) as against 87.11 as per business recorder( considering these domestic market rates).
54
Dollarization primarily refers to the trend of keeping savings in US dollars by the residents in order
to avoid currency risks. Here, the author, refers to the trend of keeping saving in foreign currencies
like, US dollar, UK pound, Euro etc.
55 Ishrat Husain,Why Pakistan Should exit the IMF programme
56 www.sbp.org.pk

Talha Aziz Khan 18

Source57

Dependence on the inflow of remittances is indicative of the vulnerability of the

current account and the external debt stock. Any external shock resulting in drying
up of the remittances will badly affect the debt sustainability. For example, if
Pakistani expatriates feel that their savings are safer outside, a trend which
reversed after 9/11, or bad economic performance of Pakistan. This may also
happen if, like the 90s, there is increase in the routing of remittances through
unofficial channels due to high premium vi-a-vis official channels.

5.1.4 FDI and domestic stability

Another official argument in favour of the euro-bonds is to attract foreign direct

investment. It is asserted that the entry into the capital market is indicative of the
good economic health. However, it is important to note that the FDI is not simply
dependent on ability to raise capital from the international capital markets. It is
also dependent on propitious social, political and economic environment.
Moreover, it is largely influenced by the image of the public institutions, especially
judiciary.

Political scenario of Pakistan is kaleidoscopic. Only during the current year there
have been three prime ministers. Currently, there is increased confrontation
between the government and the opposition parties. People are still doubtful
whether the parliament would complete its stipulated term.

Socially, Pakistan is considered as an unsafe place for the foreigners and foreign
investors, especially after the 9/11. Instability in Afghanistan has its domino effect in
Pakistan. Its high profile role in the post 9/11 period has rendered it even more
vulnerable to terrorist activities.

In such a scenario, issuance of euro bonds would never attract huge foreign
investment.

5.1.5 Matter of Sovereignty

57
http://www.sbp.org.pk

Talha Aziz Khan 19

It is also argued that shift from the IMF to the international capital market is
necessitated by the issue of sovereignty. That the IMF conditionalities infringe upon
the sovereignty of a country is beyond doubt. But the important question that
arises is whether Pakistan has severed its reliance on other international institutions
which attach conditionalities with their loans. The answer is in negative. For
example, Pakistan is still largely dependent on the World Bank for meeting the
reconstruction and restructuring costs. It is also going ahead with its poverty
alleviation commitments with the Asian Development Bank.58 The government has
not shown any intention of ending reliance on these institutions. Given this fact,
ending reliance on the IMF cannot resolve the critical issue of ‘infringement of
sovereignty’.

No less important is the fact that after the successful implementation of the PRGF,
Pakistan has cordial relationship with the IMF. If it negotiated second PRGF, it could
successfully convince the IMF as to the horizontal and vertical extent of the reforms
(if it has any disagreement).59

5.1.6 High Cost of Debt

It is accepted that the interest rate on the euro bonds is lesser than the
competitive bonds issued by the countries with almost the same credit rating
However, there are no two opinions that the interest rate of 6.75% on the euro
bonds is excessive given the recent debt crisis and the persistent economic
vulnerabilities. It is important to note that the euro-bond2005 which was swapped
with three previously issued euro bonds will mature in 2005, the debt servicing and
retirement on account of this borrowing may pose problems, especially when
analysed along with the servicing payments on other debts.

It is reported that Pakistan is issuing an Islamic bond named Sukuk. The size of the
bond would expectedly be US$500millions.60 This is indicative of the fact that the
government is in need of funds. Even if it is assumed that the credit rating would
improve prior to the launching of the bond, the interest rate would not be much
affected. It means that Pakistan would be entering into a new expensive debt
agreement. This is likely to affect the debt stock and the servicing thereof.

It important to note that high cost debts, among other things, were responsible for
the debt crisis of the 1990s.

5.2 Euro-bonds or IMF’s PRGF?

58 See, World Bank, Pakistan’s Tax Reform Receives US$100 Million Boost from World Bank, Press
release no. 2005/213/SAR, December 7, 2004. Also see, ADB,
http://www.adb.org/Pakistan/default.asp.Also See, eg, Dawn, Donors offer 270m for poverty
alleviation December 12, 2004, http://www.dawn.com/2004/12/12/
59 See, eg, remarks of the Governor State Bank of Pakistan: Pakistan and the IMF: 1988-
2002(presented at the International expert workshop organized by the German Foundation for
Development), p5 http://www.sbp.org.pk. Under the PRGF period, the relationships were cordial
and the attitude of the IMF staff showed flexibility.
60
See, eg, Dawn, S&P rating upgrade may boost Islamic bond price November 24, 2004. Also see Dawn, Citibank,
HSBC named lead managers: Islamic bonds October 20, 2004 <http:www.dawn.com.>

Talha Aziz Khan 20

As borne out by the analysis of the economic data for the 1990s, the IMF policies
contributed to the debt crisis of the country. These were not only self-contradictory
but also hindered the achievement of the policy objectives of the IMF. Moreover,
the extent and the sequencing of the reforms, especially trade liberalization,
devaluation, free-float of the currency and financial sector reforms with thrust on
the auction of public debt aggravated the debt crisis. The frequent devaluation of
currency against US dollar did more harm than good: inflated import bill, flight of
capital, dollarization of economy, inflation and increase in the rupee value of the
public debt. Add to this the extension of GST to the agricultural inputs and retail
level. In a nutshell, the policies of the IMF brought hardship to the people of the
country. These contributed to the rise of poverty. Against this backdrop, it is
commendable that the economic managers decided to end dependence on the
IMF and go to the international capital market. However, it raises two important
questions: first, would entering into a second PRGF have made any difference to
the policies of the economic managers? Conversely, would there be change in
the economic policies of the country in the post PRGF period?61 Second, is it the
right time to go to the International capital markets for contracting loan at high
interest rate?

First, there seems to be no shift in the policies of the economic managers after the
end of the first PRGF. They seem determined to follow the fiscal discipline and the
reform programme etc.62 Importantly, Pakistan has implemented almost all the
major structural and financial reforms as required by the IMF.

Against this backdrop, it can be argued that entering into a new PRGF with the
IMF at this point in time would have been more beneficial to the country at least in
terms of very low interest rate. Moreover, it would have placed more funds at the
disposal of the country.63 It has payment period of 10 years with 5.5 years of grace
period.64 On the other hand, the Eurobonds are worth US$500 million, with interest
rate of 6.75% and maturity of 5 years. Hence, if there is going to be no policy shift,
the second PRGF would have been much beneficial in terms of interest rate and
time period.

Second, the PRGF, successor of the ESAF, is an improved version. For, it focuses on
the reduction of poverty through macroeconomic adjustments. Secondly, IMF
having learnt from its mistakes of the 1990s has attempted to rectify the ownership
crisis of the reforms. That is to say, given the common perception that the
governments usually do not own the IMF packages, it has attempted to shift the
ownership to the governments. This is done encouraging the formulation of
package in consultation with the policy-makers and other stake-holders.65

61 The PRGF expires in December 2004. See IMF Press Release no. 4/259(December 1, 2004)
62 Ibid, pp5-9; Federal Budget 2004-05, Budget Speech of the Finance Minister [13] at
www.finance.org.pk [22,23,27]
63 Under the first PRGF , funds of 1.322 billion were approved.
64 See IMF Press Release no. 4/259(December 1, 2004)

65 see, IMF, Pakistan : Poverty Reduction Strategic Paper, February 9,2004

http://www.imf.org/external/np/prsp/prsp.asp#P. cf, IMF, Independent Evaluation Office(IEO)
Talha Aziz Khan 21
Third, the Governor, State Bank of Pakistan, in his paper66 commented:
Once the track record and credibility of Pakistan were established the dialogue between
the two sides became more productive and fruitful. There was a genuine desire to resolve
outstanding issues in a spirit of openness and frank exchange.

This highlights two important points firstly, the PRGF is prepared in consultation with
the concerned country and secondly, the relations between the Fund and
Pakistan were friendly. The statement of the Governor SBP also highlights the
flexibility exhibited by the IMF and its understanding of the difficulties of the
country. It can be argued that given the underlying purpose of the PRGF and
friendly relations with the IMF, Pakistan could have entered into a new loan
agreement on its own terms.

6. Conclusion

In conclusion, Pakistan has registered a commendable economic recovery since

2000. The macro-economic indicators have improved. It has successfully managed
the debt crisis of the 1990s. The credit for steering economy out of the debt trap is
attributable to number of factors. These include good economic management
and the restructuring of the debt by the international lenders. Although the
economy has made recovery, it is far from stable. Any mismanagement or laxity
may give rise to a new debt trap.

Against this backdrop, the issuance of euro-bonds may not be a good move on
the economic chessboard. Similarly, decision to end reliance on the IMF seems
lacking economic acumen. It is not because the issuance of euro-bonds and the
severance of future loan-ties with the IMF are unwise steps. Such steps are usually
indicative of financial health of an economy. Although the economy has made
commendable recovery and resultantly debt position has improved, it is far from
stable. It is highly vulnerable. There are a variety of reasons.

Firstly, the improvement in the economy and the debt situation is partly due to
rescheduling of loans. It is nothing more than a cash flow incentive. That is to say,
economy will have to bear the cost of debt servicing in the coming days. It has
merely provided a fiscal space to the economic managers to set house in order
and rectify the fundamental structural flaws in the economy.

Secondly, export base of Pakistan mainly comprises raw materials and less-value
added items. Major chunk of the exports are dependent on the agriculture sector.
Bad weather conditions directly bear on the export targets. The exports are
concentrated almost 4 items, namely, cotton, rice, leather and sports goods. An

of the IMF, Report on the evaluation of Poverty Reduction and Strategy Papers(PRSPs) and the
Poverty Reduction and Growth Facility( PRGF) ( October 6, 2004)
http://www.imf.org/external/ns/search.aspx?NewQuery=prgf&Sort=Date&Filter_Val=N&page=
2&col=SITENG&collection=&year=&rcount=50&swr=0&LastQuery=
66
See Ishrat Hussain,Why Pakistan Should exit the IMF programme p5.
Talha Aziz Khan 22
exogenous shock in any of these sectors will affect the balance of payments and
the debt paying capacity. Similarly, the export market is also limited.

Thirdly, increase in the inflow of foreign remittances has played an important role in
the economic recovery. The DMS also envisions a continuous inflow of increased
remittances. However, such an inflow is highly dependent on external and internal
factors. This stream may dry up as happened in the 1990s. This shows the
vulnerability of the economy and future debt payment capacity.

Fourthly, Pakistani rupee is not a stable currency. Despite its being almost stable
against US dollar since 9/11, it has considerably depreciated against the other
currencies, such as yen, British pound and euro. Already a dollarized economy, this
reinforces the trend of keeping foreign currency deposits by the residents in order
to avoid risk. Moreover, since 9/11, US dollar has been weakening against other
international currencies. As external debt stock is expressed in dollars, weak dollar
adds to the non-dollar component of the stock. Not only this, the twin processes
also affect the import bill in respect of the items traded in non-dollar currencies.
This ultimately affects the balance of payments and borrowing needs.

Fifthly, objective of encouraging FDI cannot be realized merely by issuing euro-

bonds. Increase in FDI is the sum total of number of factors including socio-political
and institutional framework of an economy. Given the current socio-political
scenario, achievement of this goal seems a furlong hope.

Sixthly, there seems to be no shift in the economic management strategy in the

post-IMF scenario. The economic managers seem to press ahead with the
structural reforms, trade liberalization and financial discipline: the policies agreed
with the IMF. Add to these friendly relations with the IMF. Contracting, at least, a
second PRGF would not have brought any additional hardship to the people.

Lastly and above all, Pakistan has to pay interest rate of 6.75% on the euro-bonds
which would be due by 2009. On the other hand, PRGF carries an interest rate of
only 0.5% with payable on a much longer timeline (10 years). Moreover, another
euro-bond-Islamic bond-is also in the pipeline. The high interest rate on euro-bonds
may become problematic in future in case of any external shock. Even if there
should be no external shock, the debt servicing payments accounting for the
difference in the interest rates, could have been used for the long-neglected
social sector, especially poverty alleviation.

In view of the above facts, it can be argued that the issuance of euro bonds and
ending of reliance on the IMF are the right decisions. However, given the
vulnerabilities of the economy, fundamental flaws and poverty, it was not the right
time to take such initiatives. This is the wrong time for such right initiatives.

Talha Aziz Khan 23

 Bibliography
1. Books
• C.Paul Hallwood and Ronald MacDonald, International Money and
Finance( 3rd edition, Blackwell Publishers Ltd) 2000;
• Heather D Gibson, International Finance: Exchange Rates and
Financial Flows in the International System( Longman Group Limited
1996)

2. IMF websitewww.imf.org
• IMF Concludes 2002 Article IV consultation with Pakistan, Public
Information Notice(PIN) No. 02/128;
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Association, Debt sustainability in Low income countries- proposal for
an operational Framework and policy implications( february3, 2004);
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Technical memorandum of understanding, November 4, 2000;
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Second Review under the Extended Arrangement, Approves
Financing under the CCFF for Pakistan, Press release no.99/3, January
15 1999;
• IMF Lending, a fact sheet December 2004;
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in Four recent cases, February 21, 2002;
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3. Paris Club(www.parisdeclub.org)
• Press release, December 13 2001 ;
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• Dr. Ashfaque H Khan, Pakistan’s exports: what needs to be done;
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• Updates, A Debt Burden Reduction and Management Strategy(Summary Report)
<www.sbp.org.pk>
• Ishrat Hussain,Why Pakistan Should exit the IMF programme?
• Ishrat Hussain ,Strategy for external debt management1999-2004;

5. www.eldis.org
• Tilat Anwar, Unsustainable debt burden and poverty in Pakistan: a
case study for enhancing HIPC initiative;
• Dr. Qais Aslam, Pakistan’s debt position and the question of debt
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Talha Aziz Khan 24

6. ACDIS, Unversity of Illinois
<http://www.acdis.uiuc.edu/Research/OPs/Cheema/cover.html>
• Faisal Cheema, Macroeconomic Stability of Pakistan: the role of the
IMF and the World Bank( 1997-2003)
• Prof. Khurshid Ahmed( former Senator and Chairman Institute of Policy
Studies, Islamabad, Pakistan Economy: External Sector Crisis.

Talha Aziz Khan 25