Friday September 29, 2023

Govt to launch Islamic Sukuk bond

January 24, 2021

ISLAMABAD: The government has decided to place 750 acres of the F-9 Park Islamabad as a guarantee for launching the Islamic-denominated Ijara Sukuk bond at domestic and international markets to fetch $500 million to $1 billion for building up reserves and providing budgetary support.

A summary to this effect will be placed before the federal cabinet scheduled to be held under the chairmanship of Prime Minister Imran Khan on January 26. It will be the first time under the PTI rule when the government is going to launch an international Sukuk bond. The PTI government used to oppose issuance of international bonds when it was on opposition benches.

The summary of the Finance Division has been forwarded to the Cabinet Division for seeking formal approval. The government had placed the Jinnah International Airport Karachi and power distribution companies as guarantees for launching domestic Sukuk bonds last year. The government had also kick-started the process for launching Eurobond to fetch another $1 billion. Now the hired advisors recommended the government to launch an international Sukuk bond as well.

There were 10 banks that participated in the bidding for the selection of a financial adviser for launching the Eurobond including JP Morgan, Citibank, Bank of America, Standard Chartered, Deutsche Bank, Credit Suisse, Bank of China, Dubai Islamic Bank, Emirates NBD and Meezan Bank.

After getting an indication from Saudi Arabia that a $2 billion deposit loan would have to be returned without further rollover, the government had started exploring all available options to build up foreign currency reserves. Pakistan’s foreign currency reserves held by the State Bank of Pakistan (SBP) stood at $13 billion after paying back the liabilities. Islamabad has started managing foreign inflows from all possible avenues, including going back to the international market to launch an international bond and become visible on the radar screen of international investors.

It will be the first international bond transaction that is going to be launched during the PTI government. The PTI leadership used to criticize the launching of international bonds, especially where the assets were placed as guarantee. Some PTI ministers always extended staunch opposition when the Ministry of Finance tabled any such proposal before the ECC or the federal cabinet. Finally, the government granted a nod for launching an international bond after which the Ministry of Finance kept $1.5 billion inflows through launching of international bonds in the documents of the current fiscal year’s budget for 2020-21.

There are apprehensions that without formal restoration of the IMF programme, it will not be viable to launch the Eurobond in the international market. It seems that the restoration of the IMF programme is around the corner now.

Meanwhile, Ministry of Finance said that Sukuk are Shariah compliant borrowing instruments backed by physical assets, and are structured so as to pay returns on investment as rent instead of interest by utilizing an underlying asset.

Sukuk are not only issued to support the Government’s budgetary position, but also to promote Islamic banking finance in the country, which is a constitional obligation.

Government of Pakistan has issued Sukuk several times, which were backed by assets such Motorways (M1, M2, M3) and Jinnah International Airport. Other Federal Government assets such as the Islamabad Expressway, Allama Iqbal International Airport and F-9 Park have been identified, in consultation with experts in Islamic finance, as good potential candidates for Sukuk structures.

It must be emphasized that the benefits of Sukuk include:

• Lower financing cost for the Government

• Provision of Shariah-compliant investment avenues

• Fulfilment of the constitutional requirement of eradication of Riba

• Promotion of the Islamic financial industry

The Sukuk market is growing rapidly around the world. Till the close of 2019, Sukuk worth USD 1,247 billion have been issued globally. Malaysia has been the global leader in Sukuk market. Other important issuers are Saudi Arabia, UAE, Qatar, Oman, Jordan, Turkey, Morrocco and Indonesia.