Government plans to issue sukuk

April 10, 2010

KARACHI: Pakistan plans to sell Islamic bonds, known as sukuk, in the local debt market in the next three months, said Asad Qureshi, the executive director of financial markets and reserve management at the central bank.

“The idea is to expand the yield curve both ways” by issuing both short and long-term sukuk, Qureshi said in an interview in Karachi on Thursday. Pakistan may also sell notes that “mimic” conventional treasury bills, he said.

Pakistan, South Asia’s secondbiggest economy, is looking to raise funds to finance a budget deficit that is widening as the government boosts spending to fight militants in northwest tribal areas. The deficit will widen to 5.3 per cent of gross domestic product (GDP) in the year ended June 30 from 5.2 per cent last fiscal year, according to the finance ministry.

Pakistan, which has a population of more than 150m, turned to the International Monetary Fund (IMF) for a $7.6b bailout in 2008 after reserves plunged 75 per cent. The loan amount was increased to $11.3b in July last year. The government has Rs42.2b ($503m) of outstanding sukuk sold in the domestic market in 2008, six years after it introduced Islamic financing in 2002. Islamic law, or Shariah, bans payment of interest and stipulates agreements be based on transfer of goods or services.

“By selling short-term sukuk, the government will be meeting the demand from Islamic investors, who are looking for new avenues and instruments,” said Muhammad Asad, who manages Rs10b of Islamic funds as chief investment officer at Al Meezan Investment Management Co in Karachi. Assets held by Islamic financial institutions may rise five-fold to more than $5t from $950b last year, according to a Moody’s Investors Service report dated April 6.

Global sukuk sales may climb 24 per cent this year, led by Asia as the region’s expansion helps lead the world out of recession, CIMB Group Holdings Bhd, last year’s top sukuk underwriter, said in February. Such sales rose 43 per cent to $20.2b in 2009 and totaled almost $2b so far this year. Regulators around the world, including Bahrain and Malaysia, are looking for ways to make Islamic finance products more suitable to investors globally.

The International Islamic Financial Market, the Bahrain-based organisation seeking to set standards for Islamic securities, said this month it will issue new global guidelines for Shariah-compliant bonds. The Pakistani government may sell sukuk in international markets in six months to a year, Qureshi said. ‘Not Conducive’ “It is not a very conducive time to go to the international market now,” he said. “We are working on it.”

Pakistan sold $600m of sukuk in overseas markets for the first time in January 2005, backed by assets including the country’s highway projects. The finance ministry has said that it plans to issue as much as $1b in debt globally and sell state assets to shore up its finances. Credit-default swaps protecting Pakistan’s debt have fallen from 3,084.3 basis points on January 1, 2009, to 706.7 on April 7, according to prices from CMA Data Vision in New York. The State Bank of Pakistan (SBP) last sold Rs65.37b conventional treasury bills on April 7, which included issuance of three-month bills at a yield of 12.09 per cent.

The government may reduce the number of maturities it offers on treasury bills and so-called investment bonds to not more than eight, Qureshi said. Pakistan has issued more than Rs1t of treasury bills with three maturities and Rs480b of investment bonds with seven due dates, according to the central bank. It sells treasury bills fortnightly and investment bonds quarterly.

“This will deepen the market by reducing the volatility in price and attracting more liquidity,” Qureshi said. “We want each point in the yield curve to be liquid.”

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