After a long wait, Islamabad finally launched the Pakistan Banao Certificate (PBC), a diaspora bond for overseas Pakistan, and the return on investment, in dollar terms, is more than twice the rates offered by similar instruments in the US and Saudi Arabia.
According to a working document by the State Bank of Pakistan, the PBC is offering 6.25% profit for a three-year PBC and 6.75% for its five-year version. These rates are much higher than what you can make from similar investment in the US bond market or similar instruments in Saudi Arabia.
The US bonds offer 2.49% profit on three years and 2.87% on five years, while the rates in the Kingdom are 2.89% on three years and 3.5 to 4% on five years investment in similar instruments, the SBP says.
All Pakistanis living abroad are eligible for these certificates, which will be issued against dollars (the base currency) to those who have valid citizenship documents, such as computerised national identity cards (CNICs), National Identity Cards for Overseas Pakistanis (NICOPs) or Pakistan Origin Cards (POCs) and bank accounts outside Pakistan. However, they will have to invest a minimum $5,000 as per the requirement.
To facilitate the expats, the government has created an official PBC portal, which makes the entire process online. The investors will be able to encash their investment anytime in the Pakistani currency, but premature dollar encashment, that is within a year of issuance, will have a penalty of 1%. Similarly, the government when your PBC matures, you will have the option to receive payment both in dollars and the rupee, but the government will pay another 1% in case of rupee.
The reason government is pressing on rupee encashment is because it needs to shore up its dollar reserves, which hit their lowest level in four years last year. In fact, shortage of foreign exchange is the biggest challenge facing this government since it came to power in August. Even before assuming charge of finance minister, Asad Umar had said the PTI government will heavily rely on the expat community, the Prime Minister Imran Khan’s support bank.
However, Umar also said they would design the overseas bond in a way that also allows these expats to make good profit and help the government overcome a looming balance of payment crisis.
Pakistan has a large trade deficit as we spend two dollars for every dollar earned. This has led to a drain of our dollar reserves to a level that is not sustainable to keep the economy afloat. That is we don’t have enough dollars to repay our loans and continue essential imports (oil, machinery for power plants and other industrial needs, and key raw materials etc). To avoid a default on payments, the government needed $12 billion for the year ending June 30, 2019.
The PTI government has been able to take care of its external finance needs for the current financial year because the premier’s successful visits to Saudi Arabia and the UAE last year. Riyadh has deposited $3 billion in the SBP’s account to support our dollar reserves while the UAE has also dispatched $1 billion last month, which will be followed by another $2 billion soon. There are reports that the Chinese government has also agreed to provide at least $2 billion.
That said, Pakistan still needs more dollars to sustain its economic growth. Moody’s investors service has already warned that we have fewer dollar than we need to meet our external financing needs in the calendar year 2019. Since the talks with the International Monetary Fund (IMF) have delayed twice, it is highly unlikely that Islamabad will get another loan from the global lender anytime soon. It will, therefore, depend on issuing sovereign bonds to raise capital from international investors.
Since Pakistan is not under an IMF programme, raising capital from international investors will be very expensive so it is relying on around 8.5 million overseas Pakistanis across the world to meet some of its dollar needs.
The government believes these expats are inclined to stay connected with Pakistan through investments, philanthropy, and personal involvement. According to the SBP, the United States is home to about 500,000 Pakistanis while 2.2 million are based in Saudi Arabia and 1.3 million live in the UAE and another 1.2 million are in the UK.
These Pakistanis already make an important contribution to the development of our country in the form of remittances of over $20 billion a year. By floating these certificates, the government wants to increase its dollar reserves and raise financing for critically important infrastructure projects including dams, road networks, power generation and transmission projects.