Pakistan launches $1 billion Sukuk Bond after four years

ISLAMABAD: Pakistan entered the Islamic-denominated Sukuk Bond market on Monday after a pause of four years for raising $1 billion at an offered yield of 7.95 percent against the initial price targeting range of 8.25 to 8.37 percent.

It is probably the highest-ever yield offered for asset-backed Islamic Sukuk Bond for Pakistan. The ruling PTI had always opposed the Sukuk Bond when it was sitting on the opposition benches; it had argued that the country's assets were mortgaged to get loans. It was opposed by some cabinet members in the last 41 months' rule of PTI whenever the summary for launching the Sukuk Bond was tabled before them.

In the wake of increasing external vulnerability, Pakistan has so far raised $2 billion during the current fiscal year through the launching of international bonds against budgetary projection for raising $3.5 billion for the ongoing financial year 2021-22. Pakistan had raised $1 billion through the Eurobond in July 2021 and now $1 billion is targeted through the Sukuk Bond in January 2022.

Pakistan had launched the Sukuk Bond in 2014-15 at fixed rate of 6.75 percent for raising $1 billion. Islamabad launched $1 billion Sukuk Bond for five years in October 2016 at the rate of 5.5 percent, then in December 2017 at the rate of 5.625 percent respectively.

The highest-ever rate is now being offered on Sukuk Bond despite the government's claims that the country’s economy has stabilized. Many independent economists argued that the launching of Sukuk Bond before revival of the IMF program does not make sense.

This could have been better priced if the IMF was on board. Pakistan has done everything to get the IMF back but it does not make sense for hurrying to raise cost of long-term debt.

The government placed asset backed guarantee of Motorway (M-2) portions for launching the $1 billion Sukuk Bond. It has established a Special Purpose Vehicle (SPV) for the launching of the Sukuk Bond.

Pakistan has always adopted the Malaysian model for launching its international bonds as it is linked with the US treasury over LIBOR (London Inter-Bank Offered Rates) for providing mark-up to investors. In the Dubai model, the construction index is developed where the mark up is linked with an increase or decrease into the construction index of any asset.

Pakistan’s liquid foreign reserves stood at over $17 billion held by the State Bank of Pakistan. The foreign currency reserves held by the SBP reduced by $562 million last week.

In the last few months, the foreign currency reserves reduced by over $3 billion despite getting inflows from Saudi Arabia on account of $3 billion deposits and $2 billion from the IMF. The country’s current account deficit widened to $9.1 billion in the first half (July-Dec) period of the current fiscal year and with the existing pace, it may touch $18 billion mark. However, Pakistani authorities are expecting that the POL prices in international market might reduce in coming months and logistics cost through sea might also witness a dip, so the overall pressure on imports might recede in coming months.