Government to seek nod from IMF to issue Rs 200 billion sukuk

The government is to seek International Monetary Fund's (IMF's) nod for issuance of fresh Sukuks worth Rs 200 billion meant to reduce the stock of historic circular debt, well-informed sources told Business Recorder.

IMF's Review Mission is expected to reach Islamabad on November 28, 2019 to evaluate implementation on targets agreed by the Government of Pakistan for $ 6 billion facility. On Friday, Ministry of Finance held a meeting with senior officials of concerned Ministries/ Organizations on the implementation of first and second quarter benchmarks of the IMF programme. The officials of Finance Ministry, Power Division, Federal Board of Revenue, Cabinet Division, Petroleum Division, Privatisation Division, etc., attended the meeting.

Minister for Power and Petroleum, Omar Ayub Khan last month stated that expensive power sector loans are being replaced with Sukuk which will lessen the financial impact on the economy. Pakistan's circular debt is about Rs 1.6 trillion, of which half the amount is parked on the books of PHPL which, according to the IMF, is a potential threat to Pakistan's macroeconomic performance.

The sources said Finance Ministry has to retire some loans to get fresh facility as per the understanding with the IMF. The government has also increased power tariff in accordance with the agreement with the Fund. Nepra accorded approval to increase in tariff a couple of days after the public hearing, in the best "national interest" as described by the incumbent Chairman Nepra.

"Power Division expects that new Sukuks will be issued sometime in December, 2019 - after the completion of the first IMF Review Mission," the sources added.

The issue of sovereign guarantee for fresh Sukuks of Rs 200 billion has been raised with the State Bank of Pakistan.

Meezan Bank Limited, Faysal Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan, MCD Islamic Bank Limited and Al Baraka Bank Pakistan Limited are the mandated lead arrangers.

Power Division has completed all codal formalities including identification of properties to be pledged with the consortium of banks against the loans but the issue of guarantees is still unresolved.

The sources further stated that Finance Division has retired some sovereign guarantees of small amounts to ensure that power sector loans are availed as early as possible because the present level of sovereign guarantees is higher than agreed with the Fund. The actual stock of loans is available with the central bank.

Following several years decline in the flow of circular debt in the power sector, new arrears accumulated during FYs 2018 and 2019, reaching close to Rs 800 billion (around 2 per cent of GDP). Delays in adjusting tariffs, reversal of policies, such as revenue shedding- and the non-payment of implicit subsidies by the government have been the main contributors to the increase in arrears.

An official told this newspaper that Auditor General of Pakistan has conducted audit of Rs 200 billion loans recently acquired from Islamic banks and paid to the power sector entities to avoid any legal complication in future similar to the Rs 480 billion circular debt retired by the PML-N government in June 2013.

Under the Fiscal Responsibility and Debt Limitation Act of 2005, fresh guarantees should not exceed more than 2% of the national GDP in any fiscal year. Another insider said that the amount of interest of Rs 10 billion per annum against new loans will be passed on to consumers at the rate of Paisa 11 per unit in addition to existing Paisa 43 per unit, totaling Paisa 54 per unit.

Of the total Islamic loans of Rs 200 billion desired to be raised, payments will have to be made to PSO on account of payment for fuel supplies through Hub Power Company (Hubco), Kot Addu Power Company (Kapco) and Generation Companies (Gencos) in addition to payments for RLNG. Further, payment on account of energy to coal-fired power plants will be made. Payment for capacity to nuclear power plants and Wapda to discharge their balance liabilities towards NHP arrears of the province against Wapda's invoices to CPPA-G will be also made. Balance payments will be made to IPPs against their outstanding capacity payments.

Recently, Pakistan Energy Sukuk-I (PES-I) issue of Rs200 billion got listed on the Pakistan Stock Exchange (PSX). PES-I is the largest Shariah-compliant financial instrument ever listed on a stock exchange in Pakistan. These Sukuks were approved during last financial year.