Govt to float Rs200b Sukuk next week for slashing circular debt

It will be second such issue, help pay partial dues of power producers

KARACHI: The government of Pakistan is all set to raise debt worth Rs200 billion from Islamic banks next week to partially pay off dues of energy firms on account of circular debt as further delay in payments is feared to trigger nationwide power outages.

"If the government fails to (partially) clear dues of independent power producers (IPPs) by June 28, it is feared they will face shortage of working capital and it will not be possible for them to produce and provide electricity to the national grid," a source said.

"The Ministry of Energy is scheduled to issue the second Pakistan Energy Sukuk (Islamic bond) of Rs200 billion next week to help the IPPs come out of the financial crisis," he added.

"A consortium of around 15-20 full-fledged Islamic banks, Islamic asset management companies like mutual funds and Islamic banking windows at conventional banks are set to invest in the Sukuk," Meezan Bank Product Development and Shariah Compliance Senior Executive Vice President Ahmed Ali Siddiqui confirmed to The Express Tribune.

"The Sukuk is scheduled to be launched next week (between June 24-30)," he added. Meezan Bank is the lead manager of the Sukuk issue.

Earlier, the ministry floated the first Pakistan Energy Sukuk valuing at Rs200 billion in March 2019. "The government will issue the third Pakistan Energy Sukuk sometime in July-August 2019," he said.

The circular debt surged to Rs1.4 trillion at the beginning of 2019 compared to Rs1.14 trillion during the tenure of previous Pakistan Muslim League-Nawaz (PML-N) government, which completed its term in May 2018.

The rise in circular debt stemmed from massive power leakages and theft, and partial recovery of monthly bills from consumers, government offices and government-owned hospitals, educational institutions and police stations.

Siddiqui said the sovereign Sukuk would be floated for 10 years at an estimated profit rate of Kibor plus 0.8%.

"The Sukuk will help the government save Rs6 billion in interest payments annually," he said and elaborated that Islamic banks would provide financing at 3.2% cheaper return as opposed to conventional banks.

"Conventional banks provided similar financing at an interest rate of Kibor plus 4% (in the recent past)," he recalled.

He said the government got successful in slashing the circular debt by Rs10-20 billion a month from Rs30 billion in the recent past.

The recent increase in power tariff and another one, likely in the near future, would help reduce the circular debt to zero in the next two years (by the end of 2020).

Later, the tariff revisions will help power companies generate surplus revenue, which will be used to clear the current debt, which is being accumulated in the shape of Sukuk.

"The government has planned to launch a fund to be financed through the anticipated surplus revenue," he revealed.

Earlier, a consortium of eight banks purchased part of assets of power generation and distribution companies by disbursing Rs200 billion for a period of 10 years at Kibor plus 0.8% under the first Pakistan Energy Sukuk issued in March.

"The modalities and mechanism for the second Sukuk will remain the same as those for the first Sukuk," Siddiqui said.

The energy ministry gave the amount raised in the first Sukuk to the state-owned Central Power Purchasing Agency (CPPA), which passed it on to 65-70 IPPs from which the agency purchased electricity for power distributors and end-consumers.

Pakistan State Oil (PSO), which supplied furnace oil and diesel to the IPPs, received around Rs60 billion from the Sukuk issue. Similarly, the IPPs cleared part of the debt owed to Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL).

"The first Sukuk was declared SLR (statutory liquidity requirement) eligible by the State Bank of Pakistan for all banks in the country," he said.

The ministry was also planning to get the Sukuk listed on the Pakistan Stock Exchange (PSX) so a large number of investors could be eligible for investment in the instrument, which would help the Islamic capital market grow, it was learnt.