ISLAMABAD: Pakistan aims to raise $1 billion through Sukuk bonds at a 7.95% interest rate, which is the highest cost that the country has agreed to pay in its history on an Islamic bond.
The government 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. This pulled 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 confirmed.
The rate is almost half per cent 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 of 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 officials said, a nearly 8% interest rate should be seen in the context of a rise in the interest cost around the globe after the US Federal Reserve indicated increasing the interest rates from March.
The ministry officials further 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.
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, 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.