Govt hires financial advisers to raise $750m

Officials say Lahore-Islamabad Motorway will be pledged as collateral

ISLAMABAD: The government has hired a consortium of financial advisers to raise at least $750 million next month from international debt markets by issuing Islamic bonds amid worsening external account indicators that have started hitting the country’s foreign currency reserves.

In response to an advertisement placed by the Ministry of Finance, five bidders submitted technical and financial offers, said officials. These include Citibank, Deutsche Bank, Standard Chartered Bank, Noor Bank and Dubai Islamic Bank.



Interestingly, some of these banks are also acting as financiers for the government. The Standard Chartered Bank London extended a $983 million short-term commercial loan to Pakistan last year at an interest of London Interbank Offered Rate (Libor) plus 3.25%, according to the Finance Ministry. The Noor Bank also gave $340 million in the last fiscal year at Libor plus 4.1%, it added.

The government raised this money without competitive bidding.

Except Noor Bank, the other four banks were also financial advisers for the last 2014 Sukuk bond offers in which the government raised $1 billion for a period of five years at an interest rate of 6.75%. Instead of picking one of five financial institutions, the Finance Ministry has hired all of them.

ILLUSTRATION: NABEEL AHMED

 

The Economic Coordination Committee of the Cabinet on Friday allowed the Finance Ministry to issue sovereign Sukuk bond in international debt markets, said the Finance Ministry.

The officials said that the government would pledge Lahore-Islamabad motorway as collateral to raise debt. Unlike conventional bonds, Sukuk bonds have to be backed by assets - a factor that helps lowering the overall cost of borrowings in the range of 1% to 1.5%.

So far, the PML-N government has raised $3.5 billion expensive debt by issuing dollar-denominated conventional and Islamic bonds. It will be the second Sukuk bond issuance in last two years.

The officials said that the government will start road shows from next week to sensitise international investors and the deal is likely to be clinched in the first week of October. The government did not disclose the size and tenure of the borrowings, saying the decision will depend on the market appetite.



It has projected $750 million borrowings through Sukuk bonds in its 2016-17 foreign economic assistance plan worth $8 billion. In addition to raising money through Sukuk bonds, the government has also planned to borrow $1 billion by issuing conventional sovereign bonds and seeking short-term loans from the commercial banks to the tune of $2.1 billion.

In the last fiscal year 2015-16, the government contracted $17.1 billion in foreign loans - the highest ever in a single year in the country’s history. Out of these, international lenders disbursed $7.6 billion, according to documents of the Economic Affairs Division.

Barring fiscal year 2013-14, when the government contracted $14.1 billion, Pakistan has historically contracted around $4 billion in loans a year out of which disbursements remained at roughly $3 billion, according to the Economic Survey of Pakistan.

The government is going to tap Islamic bond markets at a time when its external account indicators are not encouraging. During first two months (July-August) of this fiscal year, the current account deficit - the gap between international payments and receipts - widened to $1.3 billion or 2.5% of Gross Domestic Product, according to the State Bank of Pakistan (SBP). It was 92% higher than the comparative period.



During July-August period, foreign direct investment declined 53% to mere $112 million. In the same period, the foreign remittances dipped 3% to $3.1 billion.

The foreign borrowings are critical for the government to maintain its current foreign currency reserves. During the last two and a half months, the country’s official foreign currency reserves have depleted over $400 million to $17.7 billion as of September 16.

Although Pakistan has hoped receiving $1.65 billion from the United States on account of disbursement of the Coalition Support Fund (CSF), chances of full payments are not bright, said sources in the Finance Ministry.

Published in The Express Tribune, September 24^th, 2016.

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