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EDITORIAL: The Finance Ministry in the 22 June 2021 cabinet meeting noted that during fiscal year 2021-22 (commencing from 1 July) an additional 1.2 trillion rupees and 3.65 billion dollars is required. The preferred source, the Ministry added, would be from sukuk transactions, which to date number 32 domestic and 4 international, that have netted the government 1.573 trillion rupees and 3.6 billion dollars (excluding two energy sector sukuks of 200 billion rupees each issued in March 2019 and May 2020).

This is consistent with the budgeted revenue of 1.2 trillion rupees from sukuk for next fiscal year against 437.4 billion rupees in the outgoing fiscal year - a rise of a massive 174 percent. Revenue from external sources is budgeted at 2747.7 billion rupees with the exchange rate used lower than the present rate as at the time of the budget preparation, the rupee-dollar parity was lower than 154 which has since risen to over 158, implying thereby that the budgeted amount in rupees would be even higher. In addition, till a successful sixth review with the International Monetary Fund (IMF) is completed, budgeted funds from other multilaterals and bilaterals, other than friendly countries, are likely to be held back as their comfort level with the implementation of reforms is linked to Pakistan remaining on the Fund programme.

The Finance Ministry cited three reasons for supporting sukuk transactions over others. First, sukuk are Shariah-compliant borrowing instruments structured to pay returns on investment as rent as opposed to interest, by utilising an asset. However, to state the obvious the rent payable is added onto the country's annual debt servicing repayments.

Second, it would enable the government to meet its objective of 19 percent Shariah-compliant instruments in domestic securities by fiscal year 2023, as stipulated in the Medium-Term Debt Management Strategy, which by end December 2020 was only 3.8 percent.

And third, sukuk represents a cheaper source of raising revenue compared to say Pakistan Investment Bonds (PIBs) on which reliance was massively raised during 2019-20 and which added considerably onto domestic debt given the then prevailing discount rate of 13.25 percent. It is important to note that the reliance on PIBs is not budgeted to decline in 2021-22 (projected at 751,139 billion rupees) from 2020-21 revised estimates of 743,465 billion rupees though treasury bills are budgeted to decline to 384.5 billion rupees from the revised estimates of 586.95 billion rupees in 2020-21 though the decline is a small percentage of the projected rise in sukuk.

The rent on sukuk has been higher than 5 percent during the past decade - which is more than double compared to borrowing from multilaterals (including the IMF), friendly countries, including China, Saudi Arabia and the United Arab Emirates, and bilateral assistance. The actual rent payable was not discussed in the cabinet as that would be determined by the then prevailing market forces; however, needless to add with a discount rate of 7 percent today the rent payable on sukuk transactions should be considerably lower than in 2019.

Aviation Minister Ghulam Sarwar reportedly protested with the Finance Minister during the cabinet meeting for not taking his ministry on board for the proposed sukuk issuance on airports and his out-of-the-box, which some would say outlandish, demand for an asset utilisation fee. Given that the asset cannot be physically removed in case of non-payment of rent and further given that the issuer has to make a contractual pledge to buy back the sukuk at a stated time period the demand for an asset utilisation fee appears to be facetious at best.

It is also important to note that sukuk envisages annual rent repayments which adds up to the annual service payments that have a cost in terms of inability to allocate sufficient funds for social and physical infrastructure development from our tax rupees.

Copyright Business Recorder, 2021


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