The government is set to hold the second auction of Sukuks at the Pakistan Stock Exchange (PSX) on Tuesday, aiming to raise new domestic debt worth Rs100 billion after securing financing at a comparatively low price in the first auction held last month at the bourse.
The government has decided to gradually increase the number of auctions of its bonds through PSX, considering that investors – both institutional and individual – have significant funds at their disposal to lend to the government. The ample liquidity helps the cash-strapped government raise new debt at a lower cost.
An analyst estimated the other day that an increase or decrease in the interest rate on the country’s debt is costing the government Rs200-250 billion a year. While talking to The Express Tribune, a joint financial and Shariah-compliant adviser to the issue, Meezan Bank Senior Executive Vice President and Head of Shariah Compliance, Ahmed Ali Siddiqui, estimated “the government may raise the new financing at a rental payment (rate of return) in the range of 16-19%, which is significantly lower than the central bank’s benchmark policy rate at 22%.”
The government borrowing at relatively lower rates would create fiscal space, allowing it to finance economic activities that have remained sluggish due to the lack of financing after making interest payments on the debt. To recall, the government had raised Rs30 billion for one year at the cut-off yield (rental payment) of 19.5% in the previous auction. The financing was almost 1.5 percentage points lower compared to the one-year T-bill rate at that time. Secondly, investors had offered 12 times higher financing than the demand for Rs30 billion, suggesting ample liquidity in the market.
The T-bill rate has further fallen by around 50 basis points in the primary and secondary markets recently, suggesting the government may raise the newly targeted fund of Rs100 billion at a further reduced price compared to 19.5% in the first auction.
Siddiqui further said the government would raise Rs40 billion by auctioning a one-year Sukuk at PSX with Civil Aviation Authority’s (CAA) assets, i.e., Islamabad airport being the underlying asset for the Sukuk. It would auction four other Sukuks worth Rs15 billion each (totalling Rs60 billion), including two Sukuks of three years (at fixed six-monthly rental payments and at variable six-monthly rental payments) and another two Sukuks of five years. The rent would be determined through the auction process. The three and five-year Sukuk would be issued with Karachi Port Trust’s (KPT) assets being the underlying assets for the Sukuks.
Anyone can participate in the Sukuk auction with as little as a Rs5,000 investment in the Sukuk, it was learned.
He said the government has been selling Sukuk consistently (including at the State Bank of Pakistan) for the past notable time, raising a total amount against the Sukuk worth Rs5 trillion at present. Shariah-compliant banks bought new Sukuk of Rs1.7 trillion in the previous one year, he said.
The central bank’s latest bulletin on Islamic banking suggests the share of Shariah-compliant banks has reached 22% in total deposits, while the share of Islamic banks in financing reached 26% as of September 30, 2023. The government is required to make more people aware that they can invest in such instruments now. This would help further increase liquidity in the market and further lower the cost of borrowing for the government.
The government, however, is making the auction process complicated by introducing different methodologies for the auction like discount methodology and face value methodology with a new definition. Such complications may reduce the interest of the common man in joining the underdeveloped debt market at PSX, it was learned.
