Flood impacts growth: ‘Pakistan’s dollar bonds drop to lowest in over a month’

ISLAMABAD: Pakistan’s dollar bonds on Tuesday dropped to the lowest in over a month in the international market as the economy suffers from the worst flood in decades, putting downward pressure on agriculture, manufacturing, and services growth, Dr Khaqan Najeeb, former Adviser, Ministry of Finance, told The News.

“The country’s dollar bonds due in 2031 declined by 0.6 cents to 50.82 cents on the dollar on Tuesday, the lowest since August 2. Bonds due in 2024 also tumbled to 66.6 cents on the dollar, the lowest since August 5, 2022.”

Najeeb said it was indeed comforting for the markets to see that Pakistan had resumed its programme with the IMF after completing the 7th and 8th reviews. It did alleviate fears of a near-term challenging scenario and created the hope for unlocking funding from other multilateral lenders and friendly countries. This was at a time when Pakistan’s foreign exchange position was precarious at only $7.6 billion, covering just over a month of Pakistan’s imports.

Dr Najeeb explained this did create calm in the FX and Euro bonds markets, which had been quite uneasy for the past few months. However, this comfort has been short-lived. The rupee, after strengthening to near Rs 214 versus the dollar, slipped to Rs221.4 on 6th Sept 2022. A similar trend has been observed in the Euro Bond prices too.

The former adviser said that the value of Pakistan’s dollar bonds declined to the lowest in more than a month as the economy suffers from the worst flood in decades, putting downward pressure on agriculture, manufacturing and services growth. Initial estimates show growth slowing down to 2.3%, barely covering population growth for FY23. The damage to cotton and rice crops may hurt exports earlier envisaged at $35.5 billion, putting pressure on the current account deficit to rise beyond the earlier $9.3 billion estimates for FY23. The growth’s slow-down and extra expenditures on flood rescue, relief, and rehabilitation will put pressure on the government’s fiscal health.

Dr Khaqan said as a result markets are jittery and Pakistan’s bonds due in 2031 were quoted lower at 50.82 cents on the dollar on 6th September, which is the lowest level since 2nd August 2022. Earlier, Pakistan bonds had increased to 58 cents on the dollar last week after the nation secured a $1.17 billion loan from the IMF, helping ease the risk of default.

Dr Khaqan concluded that Pakistan would need to shore up support from international partners and friendly countries for flood relief. Floods have taken 1,325 lives, injured 12,703 washed away 750,481 livestock, and destroyed 246 bridges and 5,563 kms of roads. This is unprecedented and would take a long time to rebuild. The IMF can also be approached for a Rapid Financing Instrument to shore up reserves.

The floods have also caused supply chain-related issues and the Ministry of Finance has estimated that inflation rate may soar to 26%, compared to the budget target of 11.5%. The IMF had already given a pre-flood forecast of 20% inflation for this fiscal year. According to Prime Minister Shehbaz Sharif, the recent floods caused more damage than the 2010 calamity. Due to the 2010 super floods, the economic growth rate had slowed down by 2% and the economic losses had been estimated at $9.7 billion.