This is with reference to a Business Recorder editorial titled “The ever-increasing burden of debt” dated 30.06.2021. The news item commented on the expected use of Sukuk for future financing of the Government during FY2021-22. It may be noted that Government consideration of Sharia based instruments like Sukuk for its financing needs is based on following merits:
The government intends to increase Sukuk issuances in the future to fulfil the constitutional requirement of eradication of Riba (Article 38) and as per the Senate Resolution 393.
The government has sought to increase Sukuk issuance in FY2021-22 to support its budgetary position as Sukuk issuances in comparison to conventional bonds allow for competitive pricing due to its asset backed structure resulting in savings for the Government. In addition, such issuances also promote Islamic financial industry including Islamic banking, Islamic mutual funds, and Takaful industry;
Internationally, Sukuk issuances are becoming the preferred choice for Governments as it diversifies the investor base, and generates particular interest from investors preferring Shariah compliant investments and are less prone to speculation due to backing of tangible assets;
Debt servicing payments on Sukuks are lower than conventional bonds supporting government motivation to reduce country’s interest cost in the future;
It has been commented that annual debt servicing would take funds away from social and physical infrastructure development. This is incorrect since Government financing requirement is dictated by the expected spending on infrastructure projects, subsidies, health, education, and poverty eradication projects. Therefore, raising of funds from Sukuk directly cover the shortfall in tax collection to meet these expenses.
Debt Policy Coordination Office, Finance Division
Copyright Business Recorder, 2021