Pakistan issues $1b five-year sukuk bonds to fill trade gap

Pakistan's current foreign exchanges reserves surpass $23 billion

Pakistan has just launched $1 billion Shariah-compliant sukuk bonds despite new political skirmish in the region.
The offers made for the bond totalled $2.4 billion out of which an amount of $1 billion has been accepted. The profit, yield or interest paid on the bonds will be 5.5 per cent per year, it was officially announced in Islamabad and Washington DC. The duration of the bonds will be five years.
"The bond price at the rate of 5.5 per cent a year is the lowest in Pakistan's economic history," Finance Minister Ishaq Dar said at a news conference in Islamabad.
Prime Minister Nawaz Sharif went ahead for this second launch of sukuk bonds to raise Pakistan's current forex reserves of $23 billion plus, not only to strengthen its import funding base but also to show to his political opponents that his "government is strong and popular," while moving towards national parliamentary elections.
The need for the launch also rose because Pakistani exports are in a constant shrinking mode down from $25.1 billion five years ago to just $20.9 billion in FY-16 that ended June 30.
"There is not much for the exports to show an immediate uptick in the current FY-17, as the demand in the international market continues to be soft on the back of crash of the world oil and commodity prices," Commerce Minister Khurrum Dastgir said.
Since the start of the international oil price crash, Islamabad feels a bit insecure regarding the continuous inflow of home remittances sent by overseas Pakistanis. However, during the first two months of financial year 2016-17 the inflow rose but there was a slight blimp in the amount incoming from Saudi Arabia.
Nontheless, overall the remittances especially those from the UAE-GCC region are rising. The total global inflow may even surpass the export earnings this year. This is because while the remittances are projected to rise 10 per cent - the exports are not. The actual inflow of home remittances was at a record $18.772 billion in FY-15 rising to $19.914 billion in FY-16, the highest ever.
To top it all, Pakistan needs cash to repay billions of dollars of foreign credits to various countries, multi-lateral financial institutions and foreign banks. It amounts to the equivalent of Rs5.4 trillion, State Bank of Pakistan (SBP), the central bank, said this week.
Pakistan had decided on September 25 to launch the new sukuk bonds and went ahead with the plan and held roadshows in Dubai, London, Boston and New York, with its key finance ministry officials - Finance Secretary Dr Waqar Masood and Ashraf Mahmood Wathra, Governor of SBP. The sukuk transaction was finally completed in Washington on October 5 on the sidelines of the World Bank and the IMF annual meetings.
Islamabad's bond bid is led by five international banks, who are advising the government on all aspects of the issue. They include: Dubai Islamic Bank, Noor Islamic Bank, Citibank, Standard Chartered and Deutsche Bank. Two of the banks also have been lending to the government of Pakistan.  
The Standard Chartered loaned $930 million in 2016 while Noor Islamic Bank provided $340 million.
Finance ministry officials prior to the launch were saying that Pakistani economy had done well and the new transaction price should be less than six per cent - the rate at which Sri Lanka has just launched its bonds in the international market. Pakistan has pledged South Korea-built, fast track Islamabad-Lahore Motorway as the assets for launching the sukuk bonds.
One analyst points out that "the fund-raising plan by Pakistan is rated B3 by Moody's and B- (B minus) by Standard & Poor's and comes at a busy time in the region's debt capital markets."
Looking back, Pakistan had floated its eurobonds in 2014, which was oversubscribed to the level of $2 billion compared to Islamabad's demand for just $500 million. But the government then raised $1 billion at the rate of 7.25 per cent for a five-year duration, which was 558 basis point above the benchmark five-year US Treasury rate. The remaining $1 billion was generated through 10-year bonds at the fixed rate of 8.25 per cent that is 556 basis points above the like US Treasury benchmark rate.
However, on the second bond issue the government had to face strong criticism because of high pricing which forced it to be more cautious on rate offering, this time.
 
The writer is based in Islamabad. Views expressed by him are his own and do not reflect the newspaper's policy.