Floods, delay in funds from friendly countries blamed for spike in Pakistan bonds yield

ISLAMABAD: The catastrophic flood, delay in inflows of funds from friendly countries and a surge in imports have made international markets jittery. As a result, the yield of Pakistan’s five-year Sukuk maturing in December 2022 here on Thursday rose to 37.7 percent, a senior official at the Finance Ministry told The News.

“Likewise, Pakistan’s international bond of 10 years maturing in April 2024 is now yielding 40.6 percent, which is also on the higher side showing international markets are losing confidence as to whether the country will be able to meet its obligations.”

When contacted, Dr Khaqan Najeeb, an eminent economist and former Adviser, Ministry of Finance, said Pakistan’s international Sukuk maturing in December 2022 carrying a tenor of 5 years had at one time started yielding near to 50pc. It was the time when international markets were jittery considering Pakistan’s falling dollar reserves and delay in the IMF program. Subsequently, as Pakistan reached a staff-level agreement with the IMF in July and the board approved it on August 29, it calmed the markets, and Pakistan’s yields on the 5-year Sukuk maturing 5th December 2022 came down to 22.8%. At the same time, Pakistan’s 10-year international bond maturing April 15, 2024, also saw its yield drop to 30.7pc, almost 16% lower from the peak of the year.

Dr Khaqan explained this showed confidence in the markets in Pakistan’s ability to meet its international obligations, both in the short and medium term and ride the current BOP challenge. This comfort of international markets has receded due to a host of events. The floods, political uncertainty, delay in maturity of funds from friendly countries and again a rise in imports in the month of August have all contributed to make markets jittery. This is evident in the yields on 8th September, rising to 37.7% on the 5 year Sukuk maturing in December 2022 and to 40.6% on the Pakistan international bond of 10-year tenor maturing in April ‘24.

Dr Khaqan felt Pakistan’s dollar bond markets are again under pressure as the economy suffers from the worst flood in decades. All sectors, including agriculture, manufacturing and services, are expected to slow down. The floods have impacted all macro indicators with growth slowdown to 2.3% and average inflation rising to 25% in FY23. Markets feel the growth slowdown and extra expenditures on flood rescue, relief and rehabilitation will put pressure on the government’s fiscal health.

He concluded the damage to cotton and rice crops may hurt exports earlier envisaged at around $36 billion, putting pressure on current account deficit to rise beyond the earlier $9.3 billion estimates for FY23. This can put upward pressure on gross financing needs of the country for FY23 envisaged at $31 billion, which may be exceeded. Market confidence can get restored as it sees a strengthening of reserves as well as substantial international money commitments to help in the need for flood relief and rehabilitation efforts. Pakistan can also approach the IMF for financing under the umbrella of a rapid financing instrument available with the fund. “The country will also have to approach multilateral partners. The international community should also come to support Pakistan as it suffers from the worst flash floods in decades.”