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Pakistan Government Returns to International Market with First Sovereign Issuance in 2022 Raising US$1bn Through a Sukuk Al-Ijarah Offering

The Government of Pakistan returned to the international market after an absence of four years with the first sovereign Sukuk issuance of 2022 with a US$1 billion Unsubordinated Reg. S Rule 144A Sukuk Al-Ijarah offering on 31 January.

The Sukuk was issued by the Pakistan Global Sukuk Programme Company Limited, a special purpose vehicle, on behalf of the Obligor, the Government of the Islamic Republic of Pakistan, under the country’s Unlimited Trust Certificate Issuance Programme established earlier in January 2022.

The Pakistan Global Sukuk Programme Company Limited is a legal entity in Pakistan and is the issuer and trustee of the sukuk, incorporated primarily for the purpose of
participating in the Sukuk transaction. It is wholly owned by Pakistan.

The Pakistan Ministry of Finance had mandated Credit Suisse (Singapore) Limited;
Deutsche Bank AG, London Branch; Dubai Islamic Bank; and Standard Chartered Bank to act as lead managers and dealers to the transaction and to arrange a series of investor calls with accounts in London, the EU, the GCC, Asia and Offshore US.

The Sukuk, which has a tenor of 7 years and matures on 30 January 2029, was eventually priced at a profit rate of 7.95 per cent. per annum payable semi-annually in arrears on each Periodic Distribution Date. The asset pool comprises pledges on a pool of motorway projects owned by the National Highway Authority.

This is the Government of Pakistan’s fourth foray into the international Sukuk market. Its debit issuance was in December 2014 with a 5-year US$1 billion Sukuk Al-Ijarah priced at a rate of return of 6.8%, followed by a similar transaction in October 2016 priced at a profit rate of 5.5% and another in December 2017 priced at a profit rate of 5.6%.

With global interest rates edging up, the Pakistani authorities according to local reports consider the transaction pricing as the best under the current market conditions. The government in fact plans to raise US$3 billion from the international markets through Sukuk issuances.

The Sukuk Certificates were assigned a B3 senior unsecured rating by Moody’s Investors Service and a ‘B-’ rating by Fitch Ratings. The rating by Fitch is sensitive to any changes in Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR), which Fitch affirmed at ‘B-‘ with a Stable Outlook in May 2021.

The Sukuk certificates were admitted for listing on the London Stock Exchange plc’s International Securities Market from 31 January 2022.

The global Sukuk market according to the latest report from Fitch Ratings saw “seismic market growth” in 2021. Total Sukuk issued in 2021 grew strongly by 36.1% to reach a record US$252.3 billion. Central banks, governments and multilateral institutions dominated Sukuk issuances.

“This was despite Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards implementation challenges, Covid-19 disruptions and higher oil prices,” added Fitch.

Local-currency Sukuk amounted to 80% of Sukuk issuance, while hard-currency issuance amounted to 20%. About 41.2% of all Sukuk issued in 2021 were in Indonesian rupiah, followed by US dollars (19.4%), Malaysian ringgit (16.4%), Saudi riyals (13.5%) and Turkish lira (5%), said Fitch.

The key Sukuk-issuing jurisdictions of the GCC, Malaysia, Indonesia, Turkey and Pakistan issued US$230.2 billion of Sukuk in 2021. Non-core market sovereigns such as the UK, Maldives and Nigeria also issued Sukuk. Fitch-rated Sukuk reached US$132.4 billion in 2021, of which 80.1% were investment grade. Outlooks also improved. The share of Sukuk issuers with Negative Outlooks fell to 8.8% in
4Q21 (4Q20: 23.4%). Global outstanding Sukuk reached US$711.3 billion, 12.7% higher on a year-on-year basis.

Meanwhile, the Pakistan Government also raised Rs167.4 billion through an auction of 5-year fixed rate Government of Pakistan (GIS) Ijarah Sukuk on 7 January 2022 to help plug the budget gap. Because of strong demand for the certificates from local Islamic banks and Windows, the issue size was upsized from the original Rs25 billion target.

The Government also raised another Rs51.1 billion through the auction of 5-year variable rental rate Ijarah Sukuk. According to the State Bank of Pakistan, the government plans to raise Rs300 billion in funds from the sale of domestic sovereign Sukuk between January to March 2022.

The government has also taken measures to diversify its debt by adding four new assets to the Ijarah pool. They include M-4 (Faisalabad-Multan), CPEC-WC (Hakla-DI Khan Motorway), M-8 (Khuzdar-ShahdatKot-Qubo Saeed Khan – Wangu Hill Motorway) and CPEC-NC (Havelian-Thakot-Hazara Motorway) under the authority of the National Highway Authority.

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