Govt to launch Ijara Sukuk bonds next month: official

KARCHI: The cash-hungry government has planned to raise Rs35 billion by issuing Ijara Sukuk bonds in the domestic market next month, which will be used to finance fiscal deficit, a top finance ministry official said on Wednesday.

“Everything is ready and we are all set to go with it in November,” the official said on the condition of anonymity. He said the launch was originally planned for June but got delayed owing to a few ’snags’, he said without giving details.


The bonds will mature in a period of one to three years and 2,200 acres of Jinnah Terminal land in Karachi will be pledged for this purpose, the central bank wrote in its annual report for financial year 2009/10.
The government and the central bank launched the first domestic Ijara Sukuk bonds in September 2008 in a bid to diversify the borrowing mix and tap the deposits of Islamic banks. It was followed by three more issues within a period of twelve months.

Khurram Shehzad, Head of Research at InvestCap Securities, said the bonds would help reduce the circular debt of energy sector, besides giving Islamic banks an opportunity to park their money.

“It’s a win-win situation for both (the banks and the government),” he added. Islamic banks, unlike conventional peers, are flushed with liquidity amid dearth of Shariah-compliant investment avenues. Meezan Bank Ltd, the country’s first Islamic bank with 50 percent market share, declared a 52 percent growth in 9-month profit earlier this week.

Islamic banks have been aggressively mobilising deposits, particularly after the introduction of the minimum deposit rate and easing of reserve ratios. The demand of Sukuk bonds can be gauged from the fourth issue in September 2009, when banks offered Rs30 billion against the target of Rs1 billion.

Ijarak Sukuks form the smallest piece of the government’s permanent debt pie, which grew by 17.1 percent during financial year 2009-10. Around 60 percent of Rs794-billion debt was in the shape of Pakistan Investment Bonds, followed by prize bonds and Ijara Sukuks.

“The government is hard pressed to make short-term payments. In my view, it can raise up to 100 billion rupees from these bonds,” Shahzad added. But the situation is seen as a double-edged sword for the government as it will also increase the debt stock and interest payments.

The government borrowing for budgetary support remains the main factors that have kept a check on conventional banks’ liquidity, despite the increase in their deposits, the central bank said.

According to the central bank estimates, the government was likely to continue with the expansionary fiscal stance in coming quarters and a delay in external inflows would force it to borrow heavily from the banking system.