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PANDA BONDS FOR PAKISTAN’S RESCUE

It is no secret that the Pakistan’s trade deficit with Beijing is getting broader with each passing day. Unless the country comes out with some substantial measure to plug this deficit it will be too late to manage the struggling economy which is already in doll drums.

It has been said that Pakistan’s repayment towards overall obligations in terms of dividends, repayment of loans and other payments will be pegged around $42 billion over the next 20 years. This is likely to further burden the fragile financial obligations of the country.

To finance the ever-increasing trade deficit with Beijing, almost $300 billion, Pakistan has finally approved launching of Panda Bond in Chinese-denominated Yuan currency with possible transaction size equivalent to $500 million in two different tranches. China has recently granted market access to Pakistan to help boost its exports to China.

The idea was recommended and deliberated during the previous government tenure however it could not be implemented due to one or the other reasons. The main reason being the fluctuation of Chinese currency versus US Dollar and determining the agencies that will be able to absorb the losses if any.

Panda Bonds were first launched in the market by Beijing in 2005 as part of the Chinese government’s long-term efforts to turn the Yuan into a major global currency. The hope was that foreign bond issuers would rush to tap funding from China’s vast pool of savings. However, in 2017 there was a big setback with the issuance of these bonds tumbling due to rising borrowing costs and tight capital controls. A total of 25 foreign issuers sold a combined 71.9 billion Yuan worth of Panda Bonds creating a bleak future for the Chinese efforts.

As per Moody’s, the US ratings agency, Pakistan’s elevated external pressure is mainly the result of huge import bill for Chinese capital goods and debt repayment obligations of various projects under the CPEC. Current account deficit of the country has widened to $18 billion in the last fiscal year of 2017/18 from $12.6 billion in the previous fiscal year.

With all these facts in the background, Pakistan is calling this step as a well thought of multi-pronged approach to bridge foreign financing needs and building foreign exchange reserves. As per this strategy, if all goes as appreciated, in the first tranche, the RMB-based Panda Bond will fetch equivalent to $200 million worth transactions which are likely to scale upto $300 million. This is very important to finance the trade deficit.

It is only the time which will tell how much is this strategy going to help Pakistan mitigate its spiraling economic problem? Till then, IMF closing its door on the bailout package, there cannot be a better option than this for Pakistan.

28 Dec 2018/Friday                                                  Written by Azadazraq

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