PAKISTAN has raised a $1 billion (£740 million) loan through the Sukuk bond at a record 7.95 per cent interest rate, media reports said on Tuesday (25).
It is the highest cost of borrowing the cash-strapped country has agreed to pay in its history on an Islamic bond.
The ministry of finance said the country had to raise the loan to keep the official foreign exchange reserves at their required levels ahead of the repayments of some major foreign loans, The Express Tribune reported.
Prime minister Imran Khan’s government went to international capital markets after it consumed nearly $2 bn (£1.49 bn) out of the $3 bn (£2.23 bn) borrowed from Saudi Arabia one-and-a-half months ago. This brought down the gross official foreign exchange reserves to about $17 bn (£12.63 bn) as of January 14, it said.
Pakistan has issued a seven-year tenor asset-backed Sukuk bond to raise $1 bn at an interest rate of 7.95 per cent, the ministry of finance said.
The rate is almost half per cent higher than even the 10-year Eurobond that the government had floated in April last year.
The key difference between the Islamic Sukuk and traditional Eurobond is that the Islamic bond is backed by an asset that attracts less interest rate.
However, the government has paid the interest rate on an asset-backed bond, which is higher than the traditional tenor bond.
Pakistan has agreed to pledge a portion of the Lahore-Islamabad motorway (M2) in return for the loan – a national asset built in the 1990s that is now used to raise debt from the international capital markets.
However, the ministry of finance said the interest rate of nearly eight per cent should be seen in the context of a rise in the interest cost around the globe. The US Federal Reserve indicated increasing the interest rates from March.
The ministry received more than $3 bn bids at the indicated rates.
Bloomberg had first reported to its investors that the government of Pakistan has set the benchmark rate in the range of 8.25 per cent to 8.375 per cent. But the government managed to strike the deal at a lower range.
In the fiscal year 2017, Pakistan had borrowed $1 bn for five years through Sukuk at a 5.625 per cent interest rate – which at that time was five per cent higher than the benchmark five-year US paper.
An interest rate of nearly eight per cent is not only significantly higher than the previous Islamic bond deal but is also nearly 6.3 per cent higher than the seven-year US benchmark rate.
It is the highest rate that Pakistan has ever paid in its history on an Islamic bond, which indicates the desperation of the country that has long been building its official foreign exchange reserves by taking expensive foreign loans.
Last month, Pakistan had taken a $3 bn Saudi loan on tough conditions after its official gross foreign exchange reserves dipped below $16 bn (£11.89).
However, the reserves again fell to slightly more than $17 bn as of January 14, indicating that the government has already eaten up nearly $2 billion of the Saudi loan.
The current account deficit has widened to $9.1 bn (£6.76) during the first half of the current fiscal year – a figure that is almost equal to the level State Bank governor Dr Reza Baqir had projected for the full fiscal year.
In August last year, Dr Baqir had said the current account deficit would remain in the range of $6.5 bn (£4.83) to $9.5 bn (£7.06 bn) in the current fiscal year 2021-22. But the threshold is almost breached six months before the close of the fiscal year.
It is the second time in the current fiscal year that the government is conducting the capital market transaction. Earlier it had raised $1 billion in July last year, according to The Express Tribune.