Sukuks, investments in INPCs: Govt decides to re-pledge approved assets

ISLAMABAD: The government has decided to re-pledge assets approved by cabinet on June 21, 2022 for Sukuks and Investment in Islamic Naya Pakistan Certificates (INPCs) for other Islamic financing transactions of the government as and when needed, well informed sources told Business Recorder.

Sharing details, sources said, Finance Division briefed the Cabinet on February 22, 2023 that the Federal government was authorized to borrow under Article 166 of the Constitution of Pakistan.

Moreover, FRDL Act section 13 (k) stated that Finance Division could raise domestic debt through domestic government securities, bank loans or any other domestic borrowing instruments other than those issued by the Central Directorate of National Savings (CDNS). In this regard, government raised debt primarily through wholesale tradeable securities such as Treasury Bills, Pakistan Investment Bonds and Sukuks.

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According to sources, recently Government had been experiencing significant issues on its cash balances because of increased deficit financing. Debt raised from auctions of the GoP securities depended upon the participation received from the banks.

However, due to recent change in market dynamics such as increase in policy rate by SBP, as well as, ADR (Advances-to-Deposits Ratio) related tax, banks were reluctant to participate through auctions. Moreover, the borrowing from SBP had also been restricted after amendments in SBP Act. This had resulted in limiting funding avenues for the Government.

In view of the changes in policy measures, various banks had raised concerns regarding the challenges being faced by the banking sector for meeting high ADR requirements due to its related tax as well as the GoP’s difficulty in refinancing the significant auction maturities. In this regard, it was imperative for the Government to diversify its funding avenues and initiate direct credit lines both from Islamic & conventional banks or other financial institutions to fulfil its funding needs as and when required.

The Cabinet had recently approved to utilize certain assets for issuance of International as well as Domestic Sukuks& INPCs in Cabinet on June 21, 2022. Based on the government’s requirement to raise funds, the same assets as already approved vide Cabinet decision mentioned above would also be utilized for the purpose of raising other Islamic financing for Government of Pakistan.

The sources maintained that obtaining direct credit lines from financial institutions required Government to follow Public Procurement and Regulatory Authority Rules (PPRA) 2004 amended from time to time in order to seek bids from the institutions. In the current scenario, financing had to be taken on emergency basis and so it would become extremely difficult to adhere to the provisions of PPRA rules.

The current economic and financial conditions, especially delay in rollover of foreign loans and need for obtaining new loans/ deposits, required that monies were accessed on urgent basis. In such conditions, normal procurement process could not be followed.

Further, issuing of advertisements in the local and international press would result in further deterioration in market perception. Therefore, in order to seek such commercial financings from domestic financial institutions, exemption from following the PPRA rules was required. Cabinet had already allowed exemptions from PPRA provisions for incurring of foreign loans/ credit facilities vide decision dated 03rd February 2014.

Finance Division, solicited following proposals:(i) obtain domestic financing through direct credit line from Banking and Non-Banking Financial Institutions for the financing needs of the Government as and when required; and (ii) assets approved under Cabinet decision dated 21-06-2022 for Sukuks and INPCs may also be utilized for other Islamic financing transactions of the government as and when needed.; and (iii) exemption from following the PPRA Rules 2004 for seeking bids directly from banks/ financial Institutions.

Copyright Business Recorder, 2023