ISLAMABAD: The inclusion of India’s bond in JP Morgan emerging market bond index (EMBI) from June 28, 2024, is expected to attract substantial foreign investments up to $42 billion.
This will not only increase the dollars’ influx in India resulting in appreciation of Indian rupee, reducing the inflationary pressure and more importantly Indian products will become more competitive in the international market.
However, the inclusion of India, whose GDP stands at $4.11 trillion in the JP Morgan Index, will compel investors looking to diversify their portfolios and reallocate funds from other emerging markets, including Pakistan, to India, given the stability and potential returns of Indian bonds. India is currently offering 7-7.5 per cent returns to investors.
This could lead to reduced demand in the international open market for Pakistani bonds, potentially raising Pakistan’s borrowing costs. If the Indian rupee strengthens significantly, it could affect the trade balance in the region. Pakistani exporters may find it relatively harder to compete with Indian goods in the international market if the Indian rupee appreciation leads to cheaper exports from India. This is how Pakistan’s exports may suffer in the global market.
According to the budget document for FY25, Pakistan intends to float its sukuk bond of $600 million in FY25 to enable it make payments of the external loan liabilities in the next fiscal. However, there are chances that Pakistan may not float any bond keeping in view the economic outlook of Pakistan.
As of mid-2024, the credit ratings for Pakistan by major international rating agencies are not up to the mark as Fitch has affirmed Pakistan’s rating at ‘CCC’. This rating reflects substantial credit risk, indicating that default is a real possibility and S&P has rated Pakistan at ‘CCC+’ with a stable outlook. This rating points to substantial risks, with vulnerability to non-payment that depends on favourable economic and business conditions. Under the given situation, Pakistan may not float any bond in the open market.
Dr Ashfaque Hasan Khan, a prominent economist and principal NUST, who has also been an adviser to the finance ministry, said that inclusion of India’s bond in the JP Morgan emerging market bond index will certainly boost the Indian economy, but it will not impact Pakistan. He said that keeping in view the current rating of Pakistan, it is not the proper time for the finance division to float its bonds, seeking loans as the investors would seek high premiums and returns.
He said in his view Pakistan needs not to go for floating any bond in the international market as according to the IMF, Pakistan needs to arrange $9 billion for the next three fiscals -- $3 billion each year and the amount of $3 billion can be arranged from World Bank, ADB and other IFIs once the country manages to get next IMF loan programme. He also argued that investors prefer high returns investment while purchasing the paper of any country rather than investing with lower returns. So, Pakistan will not be impacted while marketing its bond in the open market after it has improved its rating.
Dr Khan said that Pakistan’s financial managers need to go for economic stabilisation and once it is achieved and the country’s rating has improved, then they should go for floating bonds. At least for the next financial year 20024-25, Pakistan should avoid floating bonds as under the given situation, Pakistan might face a higher risk premium, which means investors will demand higher returns for the perceived increased risk.
Khan said that in 2005-6 during the Musharraf regime, Pakistan was also included in JP Morgan EMBI when the Pakistan exchange market went up to $42 billion. However, Pakistan remained no more part of it as its stock exchange went down. Since then Pakistan has not been able to be included in the JP Morgan bond index.
Another economist Sakib Sherani said that joining India with the JP Morgan index will not impact Pakistan. He suggested that Pakistan should not float the bond for arranging funds in FY25 unless the country’s rating is improved. He said that Pakistan can handle its repayment of foreign loans through rollovers of loans from friendly countries and arranging more loans from IFIs.
However, for financing the imports, Pakistan should not rely on loans in dollars and should continue the existing import regime under which the imports are being compressed to deal with the current account deficit and manage the repayments of the external loans alone. Sherani mentioned that the government has included floating of sukuk bond of $600 million in FY25, but in his view it is not proper time as the country’s rating needs to improve and economic stabilisation still has to improve.