Pakistan raised USD 1 billion loan through sukuk bond at a record 7.95% interest rate
Why in news:
- Pakistan has issued the 7-year tenor asset-backed Sukuk bond to raise $1 billion at an interest rate of 7.95%, the highest cost that the cash-strapped country has agreed to pay in its history on an Islamic bond, and has also agreed to pledge a portion of the Lahore-Islamabad Motorway in return for the much-needed loan.
- The Ministry of Finance said the country had to raise the loan to keep the official foreign exchange reserves at their levels ahead of some major foreign loans’ repayments.
Key information:
- The government led by Prime Minister Imran Khan went to international capital markets after it consumed nearly $2 billion out of the $3 billion borrowed from Saudi Arabia one-and-half months ago, which brought down the gross official foreign exchange reserves to $17 billion as of January 14.
- Pakistan has issued the 7-year tenor asset-backed Sukuk bond to raise $1 billion at an interest rate of 7.95%, the Ministry of Finance said.
- The rate is almost half percent higher than even the 10-year Eurobond that the government had floated in April last year.
- The key difference between the Islamic Sukuk and traditional Eurobond is that the Islamic bond is backed by an asset that attracts less interest rate.
- However, the government has paid the interest rate on an asset-backed bond, which is higher than the traditional tenor bond.
- Pakistan has agreed to pledge a portion of the Lahore-Islamabad Motorway (M2) in return for the loan — a national asset built in the 1990s that is now used to raise debt from the international capital markets.
- However, the Ministry of Finance said that a nearly 8% interest rate should be seen in the context of a rise in the interest cost around the globe after the U.S. Federal Reserve indicated increasing the interest rates from March.
- The ministry received over $3 billion bids at the indicated rates.
- In the fiscal year 2017, Pakistan had borrowed $1 billion for five years through Sukuk at a 5.625% interest rate — which at that time was 5% higher than the benchmark five-year U.S. paper.
- Nearly 8% interest rate is not only significantly higher than the previous Islamic bond deal but is also nearly 6.3% higher than the seven-year U.S. benchmark rate.
- It is the highest rate that Pakistan has ever paid in its history on an Islamic bond, which indicates the desperation of the country that has long been building its official foreign exchange reserves by taking expensive foreign loans.
- Last month, Pakistan had taken a $3 billion Saudi loan on very tough conditions after its official gross foreign exchange reserves dipped below $16 billion.
- However, the reserves again fell slightly over $17 billion as of January 14, indicating that the government has already eaten up nearly $2 billion of the Saudi loan.
- The current account deficit has widened to $9.1 billion during the first half of the current fiscal year — a figure that is almost equal to the level State Bank Governor Dr Reza Baqir had projected for the full fiscal year.
- In August last year, Dr Baqir had said that the current account deficit would remain in the range of $6.5 billion to $9.5 billion in the current fiscal year 2021-22. But the threshold is almost breached six months before the close of the fiscal year.
- Compared with short-term expensive commercial borrowing, long-term bonds are considered the preferred choice of instruments due to their longer maturity and no conditions attached.
- However, the kind of interest rates that the PTI government is offering to foreign investors is unprecedented in the history of the country, the report said.
- It is the second time in the current fiscal year that the government is conducting the capital market transaction. Earlier it had raised $1 billion in July last year, according to The Express Tribune report.
What Is a Sukuk?
- A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia.
- Since the traditional Western interest-paying bond structure is not permissible, the issuer of a sukuk essentially sells an investor group a certificate, and then uses the proceeds to purchase an asset that the investor group has direct partial ownership interest in.
- The issuer must also make a contractual promise to buy back the bond at a future date at par value.
How does a sukuk bond work?
- Sukuk (Islamic bond or “Sharia-compliant” bond) is an Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets.
- Then, the issuer uses the proceeds from the certificates to purchase the asset, and investors receive partial ownership of the asset.
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