The federal cabinet on Tuesday waived one-dozen types of income taxes to raise around $2 billion in debt through Pakistan’s first Chinese currency-denominated bonds and Eurobonds in a bid to make borrowing relatively less expensive.

The investors who would invest in these bonds and earn profits will not be required to pay up to 30% income tax along with other taxes.

The cabinet exempted investors from income tax after the Ministry of Finance told it that without exemptions, the sovereign bonds would be “less appealing to international investors”.

The cabinet also approved the appointment of Ali Mehdi as the first chief executive officer of Pakistan Development Fund Limited (PDFL). PDFL was set up many years ago with $1.5 billion in grant that Saudi Arabia gave in 2014. The federal cabinet waived taxes on profit on debt of up to 15% for filers and 30% for non-filers, minimum 1% income tax, advance tax, dividend tax, taxes on payments to non-residents, taxes on payment of contract fee to financial advisers, taxes collected by the Pakistan Stock Exchange and National Clearing Company of Pakistan, and taxes on the auction and purchase of immovable property.

The finance ministry informed the federal cabinet that it was in the process of floating three types of sovereign instruments – Eurobonds, Sukuk (Islamic bonds) and Panda bonds – to acquire debt.

The ministry is targeting to raise $2 billion from global markets, including around $250 to $300 million from Chinese capital markets through Panda bonds, said the sources. It will be the first-ever capital market transaction in China.

The exact pricing of debt will depend on investors’ appetite but authorities believe that the cost may be around 5.5% to 6.5%, depending on the instrument and maturity.

The federal government has recently offered very high interest rate to overseas Pakistanis on their investments in digital accounts.

In December 2018, Prime Minister Imran Khan approved the issuance of Pakistan’s first renminbi-denominated bonds to take loans from Chinese capital markets as part of a long-term strategy. In the Long Term Plan of the China-Pakistan Economic Corridor (2017-30), both countries had decided to use renminbi as the second international currency to lessen Pakistan’s reliance on dollar.

Former finance minister Asad Umar was keen to venture into Chinese markets but the issue was put on the backburner after Dr Abdul Hafeez Shaikh took charge of the ministry in April 2019.

The cabinet was informed that the process of engaging financial advisers for Panda bonds had been completed.

The finance ministry has also selected a consortium of China Development Bank, China International Capital Corporation, Citibank and Habib Bank Limited for floating Eurobonds and Sukuk, according to the ministry. It said that the selection of Multi-term Note programme financial advisers was expected to be formalised soon.

The finance ministry informed the cabinet that in order to make the government’s international capital market issuances attractive to global investors, all payments of principal, interest and other amounts in respect of Eurobonds, international Sukuk and Panda bonds needed to be exempted from taxes and duties.

It underscored that without such exemption, the transaction cost made the government of Pakistan’s paper much less appealing to international investors, resulting in higher pricing for the offering.

All past Eurobonds and international Sukuk were granted similar exemptions, it added.

The Federal Board of Revenue has endorsed the tax exemptions.

The Pakistan Tehreek-e-Insaf (PTI) government doled out a record Rs1.15 trillion in tax exemptions to the affluent and under international commitments in the last fiscal year, breaking its own one-year-old record, showed the Pakistan Economic Survey 2019-20. Cumulatively, the PTI government gave Rs2.12 trillion in tax exemptions during its first two years in power.

Pakistan is going to float the bonds to keep the central bank’s foreign exchange reserves at current levels ahead of major foreign debt repayments.

In the last fiscal year, the government gave preference to very short-term hot foreign money over Eurobonds. The money raised through sovereign bonds is payable either in five, seven or 10 years and the government’s decision to give preference to hot foreign money that hardly stayed for three months in most cases has raised transparency questions.

In the past, the SBP spokesman had refused to divulge details of investments made by BlackRock, JP Morgan and Citibank out of the total investment of $3.6 billion in debt securities in fiscal year 2019-20.

PDFL

The federal cabinet approved the appointment of the first permanent CEO of PDFL. The company was working without a full-time CEO.

The position of the CEO had been advertised in August 2019 and it took the authorities one and a half year to complete the process. The human resources committee of the PDFL board had shortlisted Ali Mehdi as the principal candidate for the post of CEO. Alternative candidates were Adeeb Ahmad and Kashif Arbab.

The board had recommended that the tenure of CEO should be three years and he should draw a maximum salary of Rs1.5 million. The tenure can be extended for another three years.

Published in The Express Tribune, January 20th, 2021.

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