Govt to launch 10-year Sukuk to raise Rs6.54tr

SBP to help raise additional Rs6.29tr by auctioning T-bills, PIBs to banks between Sept and Nov

KARACHI:

The financially struggling government has announced plans to launch a 10-year Sukuk (Shariah-compliant sovereign bond) next week at the Pakistan Stock Exchange (PSX), aiming to raise new debt of Rs6.54 trillion through a combination of Sukuk and conventional bonds over the next three months.

According to an announcement made at PSX on Tuesday, this will be the first-ever auction of a 10-year Sukuk on the newly developed debt market platform. The auction, scheduled for September 16, 2024, is expected to raise Rs250 billion, including Rs25 billion from a fixed rental income Sukuk and another Rs25 billion from a variable rental income Sukuk of the same tenure.

Meezan Bank official Ahmed Ali Siddiqui told The Express Tribune that long-term investors, such as pension funds, may show interest in the 10-year Sukuk. He also anticipated that financial institutions, including banks and funds, are likely to favour the variable rental income Sukuk over the fixed-rate option.

In addition to the 10-year Sukuk, the government aims to raise Rs200 billion through the auction of five other Sukuk with tenures ranging from 1 to 5 years, offering both fixed and variable rental income options.

Siddiqui highlighted that government borrowing through Sukuk tends to cost 1 to 2 percentage points less than conventional bonds like T-bills and Pakistan Investment Bonds (PIBs). He dismissed the notion that Islamic financing is more expensive than conventional borrowing.

SBP to facilitate Rs6.29 trillion debt-raising plan In a separate announcement, the State Bank of Pakistan (SBP) revealed that the Ministry of Finance plans to raise an additional Rs6.29 trillion by auctioning T-bills and PIBs to commercial banks between September and November 2024. The new debt will partially cover the repayment of maturing old debt worth Rs5.12 trillion, while the remaining Rs1 trillion will help bridge the government's fiscal deficit.

Government reliance on domestic debt has decreased recently, with the planned debt raise lower than the Rs11 trillion target set a few months ago. This reduction is attributed to the central bank's decision to cut the benchmark policy rate by 250 basis points in June and July 2024, bringing it down to 19.5%. Financial experts estimate that each percentage point cut in the interest rate saves over Rs300 billion annually in interest payments.

Despite the lower interest rate, the government's borrowing needs remain high due to its struggle to meet tax revenue targets. Interest payments, which account for nearly 70% of total government revenue, remain a significant burden. Other major expenses include government salaries, pensions, and social spending for the poor, which continue to pressure the government to cut development spending under the Public Sector Development Programme (PSDP), a key driver of economic activity.

The central bank's anticipated interest rate cut is expected to help the government sell bonds to commercial banks at lower costs, reducing interest expenses further. However, debt servicing still remains a critical issue for Pakistan's fiscal health.

The SBP data indicates that the government aims to raise Rs3.47 trillion by auctioning T-bills with tenures ranging from 1 to 12 months during the next three months. This amount will cover the maturity of Rs4.95 trillion in the same period. Additionally, the Ministry of Finance plans to raise Rs500 billion by selling PIBs with 2- to 10-year tenures at fixed rates of return, against the maturity of Rs534 billion. The government also aims to secure Rs2.32 trillion through the auction of PIBs with variable rates of return over the same period.