The issuance of Sukuk

It is no secret that Pakistan's appetite to borrow increasingly from the international financial market would continue to grow until and unless the country is not able to remove the structural imbalance from its external sector. Resultantly, the country has been obliged to issue Sukuk bonds to borrow dollar one billion as debt repayment liabilities are fast approaching and foreign earnings, especially through exports, are shrinking. Speaking at a news conference, Finance Minister Ishaq Dar said the Sukuk bonds were issued for a period of 5 years at a return rate of 5.5 percent against an indicative target of 5.75 percent by mortgaging a portion of the Lahore-Islamabad Motorway. He claimed that this foreign debt would not have any negative impact on fiscal deficit as it would reduce local debt of an equal amount. "Bids of over dollar 2 billion were received for Sukuk bonds but we decided after a discussion to issue dollar one billion bonds," the minister added. Dar also asserted that Pakistan issued bonds at a lesser rate than the interest rate of Sri Lanka and Bahrain despite their relatively higher rating and "having no tension at the Line of Control". Besides, response from investors was widespread with 38 percent of the amount allocated to the EU countries, 27 percent to North American countries, 27 percent to the Middle Eastern countries and 7 percent to Asian countries. According to the Finance Minister, "this is the lowest-ever rate in Pakistan's history" and bond proceeds will be available to Pakistan within three working days. Asked about the reports that Saudi Arabia had sought the return of dollar 1.5 billion gifted earlier to Pakistan, Ishaq Dar stated that "this is an attempt by some sick minds to embarrass a dear friend of Pakistan and create misunderstandings... A gift is a gift. Don't play with the economy to satisfy your sickness."

The Finance Minister at the press conference seemed to be entirely satisfied, in fact was exuberant, over the amount of subscription and the terms on which the Sukuk bonds were issued to build foreign exchange reserves of the country in order to meet the coming payment needs. His pleasure was quite understandable. Pakistan had placed an initial bond offering of dollar 500 million in the market but received almost five times greater bids of dollar 2.4 billion. The government had also the cushion to raise up to dollar 1.6 billion to match the valuation of a portion of the motorway project used as a collateral to satisfy the requirement for raising Shariah-compliant funds but did not accept the full value of the collateral to give a message to the market that Pakistan was not a desperate borrower. The Finance Minister was also right in remarking that the country was able to get the loan through the present issue of Sukuk at lower rates than some other countries. It may also be mentioned that the present rate of 5.5 percent compares very favourably with the previous Sukuk bonds issued in 2014 at a rate of 6.75 percent and the Eurobonds issued in 2015 at a rate of 8.25 percent. The lower rate of course is a reflection of the growing confidence of foreign investors in Pakistan's economy and the successful completion of the IMF's EFF programme. It also stands to reason that the country would have been able to receive the amount even at a lower rate if there were no tensions at the eastern border of the country.

However, it would have been much better if the Finance Minister should have focused his attention on reducing the foreign borrowing requirements of Pakistan instead of concentrating his mind on raising more loans to meet the external sector funding needs of the country. By borrowing more and more, he is leading the country towards a debt trap and mortgaging the future of coming generations. Since home remittances are stagnating and foreign investment is not increasing, the only alternative left for the country to attain a sustainable position in the external sector is through expansion of exports. The major policy instrument for expansion in exports and curtailment of imports is appropriate adjustment in the exchange rate on a regular basis. Unfortunately, however, government seems to be insistent on stability of exchange rate, whatever the odds. Also, it does not behove the Finance Minister to say that the Sukuk bonds would cut down the interest payments because domestic debt instruments like treasury bills carrying 7.8 percent interest rate would be replaced by Sukuk bonds carrying a 5.5 percent interest rate. Even a layman knows that the advantage in the interest rate differential of two currencies could be more than wiped out by the appreciation of the US dollar over time and Pakistan in no way can print the foreign currency if it is unable to service the foreign debt in time whereas the domestic currency debt could be managed by the local authorities under all circumstances although repercussions of such a policy option could also be somewhat negative.