Pakistan launches $1 billion Sukuk bond after four years

ISLAMABAD: Pakistan entered the Islamic-denominated Sukuk bond market on Monday after a four-year hiatus to raise $1 billion at an offered yield of 7.95% from the initial target range of 8.25 to 8.37%.

This is probably the highest yield ever offered for Islamic Sukuk asset-backed bonds for Pakistan. The ruling PTI had always opposed the Sukuk Bond when it sat in the opposition benches; he had argued that the country’s assets were mortgaged to obtain loans. Some cabinet members have objected during the last 41 months of PTI rule whenever the summary of the Sukuk Bond launch has been presented to them.

In the wake of growing external vulnerability, Pakistan has so far raised $2 billion in the current fiscal year through the launch of international bonds against budget projections to raise $3.5 billion for the current fiscal 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 launched the Sukuk Bond in 2014-2015 at a fixed rate of 6.75% for raising $1 billion. Islamabad launched $1 billion Sukuk bonds for five years in October 2016 at the rate of 5.5% and then in December 2017 at the rate of 5.625% respectively.

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

This could have been assessed better if the IMF was on board. Pakistan has done everything to recover the IMF but it does not make sense to rush to increase the cost of long-term debt.

The government placed an asset-backed guarantee on the portions of the highway (M-2) for the launch of the $1 billion Sukuk bond. She created a Special Purpose Vehicle (SPV) for the launch of the Sukuk Bond.

Pakistan has always adopted the Malaysian model to launch its international bonds as it is linked to the US Treasury on LIBOR (London Inter-Bank Offered Rates) to provide a mark-up to investors. In the Dubai model, the construction index is developed where the increase is related to an increase or decrease in the construction index of any asset.

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

Over the past few months, foreign exchange reserves have shrunk by more than $3 billion despite inflows from Saudi Arabia into the $3 billion deposit account and $2 billion from the IMF. The country’s current account deficit widened to $9.1 billion in the first half (July-December) of the current fiscal year and at the current pace could reach $18 billion. However, Pakistani authorities expect POL prices in the international market to decrease in the coming months and logistics costs by sea may also experience a decline, so the overall pressure on imports may ease in the coming months.

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