Pakistan on Monday raised a $1 billion loan through the Sukuk bond at a 7.95 percent 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 seven-year tenor asset-backed Sukuk bond to raise $1 billion at an interest rate of 7.95 percent, 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 that a nearly 8 percent 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 that 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 Ministry of Finance received over $3 billion bids at the indicated rates. Bloomberg had first reported to its investors that the government of Pakistan has set the benchmark rate in the range of 8.25 percent to 8.375 percent. But the government managed to strike the deal at a lower range – at nearly 8 percent interest rate.
In the fiscal year 2017, Pakistan had borrowed $1 billion for five years through Sukuk at a 5.625 percent interest rate – which at that time was 5 percent higher than the benchmark five-year US paper.
Nearly 8 percent interest rate is not only significantly higher by the previous Islamic bond deal but is also nearly 6.3 percent higher than the seven-year US 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 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 told a gathering of journalists 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.
The SBP is also playing a gamble by offering 7 percent interest on loans that Pakistan is raising through Roshan Digital Accounts. The government is also using nearly $5 billion private foreign exchange reserves of the citizens parked in commercial banks at almost zero cost. But it has paid nearly 8 percent cost to foreigners in the shape of interest on Sukuk and 7 percent on Roshan Digital Account.
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.
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.
The government has set the $3.5 billion borrowing target through the issuance of the international Euro and Sukuk bonds during the current fiscal year.
The government chose to test the global markets just four days before the executive board meeting of the International Monetary Fund that will review Pakistan’s request to revive the stalled programme and consider approving the $1 billion next loan tranche.
Out of $6 billion, the government has so far remained able to avail only $2 billion of the IMF package due to its inability to meet the agreed conditions. Out of the two major conditions set for the approval of the loans, so far, one condition to get the approval of the SBP amendment bill remains partially implemented. The Senate has not yet approved the SBP bill.
The government is heavily dependent on external borrowings to meet its financing needs and to keep the gross official foreign exchange reserves at a minimum threshold. Despite claims about an increase in exports, the earnings are not sufficient to finance the growing import bill.
The foreign direct investment also remained shy of $2 billion annually -another area where the PTI has badly failed despite changing many chairmen of the Board of Investment in the past three and half years.
Pakistan’s foreign exchange reserves are currently sufficient for 10 weeks of import cover amid a surge in the import bill that crossed remained on an average at $7.8 billion during the past two months. The reserves remain low despite the SBP has offered abnormally high-interest rates to overseas Pakistanis investing in government securities.
The rupee is currently depreciating against the US dollar and is trading at around Rs176 to a dollar.
