As the budget deficit soared to a record high at Rs1.77 trillion in the last fiscal year, the government raised Rs182 billion through an Islamic bond, called Sukuk, against the security of Jinnah International Airport Karachi – another asset mortgaged after Pakistan Motorways (M2).
However, analysts question the use of Islamic bonds for budget financing and linking the return with treasury bills, saying it is forbidden and against Shariah laws.
The government borrowed the money during fiscal year 2011-12 ended June 30 last year, according to documents of the finance ministry.
Sukuk is a bond structured on Islamic principles as an alternative to traditional bonds. It gives creditors partial ownership in the debt asset until the borrower pays back all the obligations.
Sukuk operations were launched through the Pakistan Domestic Sukuk Company Limited incorporated in 2007.
Earlier, the government had offered the motorway land with all constructions and improvements on M-2 (Islamabad-Lahore) as a guarantee against Sukuk to generate funds for budget financing. In the last fiscal year, it borrowed a total Rs412 billion through Sukuk, enabling it to meet 23.2% of financing needs.
Compared to the original target of Rs826 billion or 4% of gross domestic product, the budget deficit in 2011-12 stood at Rs1.77 trillion or 8.6% of GDP – the highest in the country’s history. The government’s failure to implement much-needed fiscal and energy reforms led to this situation, according to the analysts.
According to the documents, “the (borrowed) amount was utilised to finance the budget deficit… and a major portion of the amount was raised on a par with the treasury bill rate for three years.”
There are differences of opinion over the use of money raised through Sukuk and linking the return with the treasury bills.
“Linking Sukuk with the fixed rate of return on any loan and security paper becomes Riba, which is forbidden under Islamic laws,” said Ahmad Mukhtar Naqshbandi, an expert in Islamic economics.
In the Sukuk model, he said, the money borrowed against the asset has to be used for the purpose described and profit on investment has also to be paid out of the return on the mortgaged asset.
Finance ministry spokesman Rana Assad Amin told The Express Tribune there was no restriction on the use of money raised through Sukuk and the government was using the Karachi airport’s income to pay profit on the investment in Sukuk.
According to another official of the ministry, the Shariah Board, which has approved the mechanism for floating Sukuk, has not objected to the nature of using the borrowed money.
According to the documents, the share of permanent debt in total domestic debt rose from 18.7% in 2010-11 to 22.2% at end-June 2012, mainly contributed by the Ijara Sukuk bond and Pakistan Investment Bonds.
The finance ministry said the government mopped up Rs159 billion through successful auctions of Ijara Sukuk and Rs356 billion through Pakistan Investment Bonds during 2011-12.
However, according to the Debt Policy Statement of 2012-13, in the last fiscal year, the government added roughly Rs2 trillion to the overall debt burden.
The economic slowdown also compelled the government to seek rollover of a significant chunk of foreign loans. Last year, roughly $1.2 billion in matured loans were rolled over. Furthermore, it got $500 million from friendly countries, which have been parked in the State Bank to shore up foreign currency reserves.
Last year, the government also obtained $256 million from International Islamic Trade Corporation under Murabaha Finance. This amount is expected to be utilised in the current fiscal year for import of crude oil and petroleum projects of Pak Arab Refinery Company (Parco).
Published in The Express Tribune, February 12th, 2013.
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