Sukuk bond: Pakistan repays $40m

ISLAMABAD/KARACHI: Pak­istan has repaid $40 million coupon on the Islamic denominated Sukuk bond, which was due on July 31, 2022.

“We have paid outstanding $40 million on account of repayment of Islamic Sukuk bond. We paid all our outstanding repayments in July 2022 and obligations in the future will be repaid on time,” confirmed top official sources while talking to The News on Monday.

The country’s foreign exchange reserves had depleted from $20 billion in August 2021 to $8.5 billion on July 22, 2022.

Despite depletion of foreign currency reserves, Pakistan has never defaulted on repayment of its loans and other obligations. Now the IMF Executive Board is expected to meet in Washington DC to consider Pakistan’s request for approving the outstanding 7th and 8th reviews and release of $1.17 billion tranche under $7 billion Extended Fund Facility (EFF). With the revival of the IMF programme, clouds of default hovering above the policymakers will evaporate for a short term, as Pakistan will have to generate its ability to raise non-debt creating inflows in order to avert risks of default on permanent basis.

Meanwhile, Pakistan’s dollar-denominated sovereign bonds have stabilised after investor sentiment improved and the local currency bounced back, changing the view the country is in danger of defaulting on its debt amid shrinking foreign reserves, analysts said.

The yield on 10-year Eurobond maturing on April 15, 2024 gained 61 basis points (bps) to 45.40 percent on Monday. The yield was 46.01 percent on Friday.

However, the yield on the five-year third Pakistan International Sukuk Company Limited, maturing on December 5, 2022, fell 116 bps to 46.69 percent. The bonds and the currency tumbled, with the yields on Eurobonds and Sukuk spiked more than 50 percent last month due to worries about the delay in the IMF bailout package caused by political uncertainty.

The country’s assets improved on optimism the nation may succeed in securing financing from the International Monetary Fund that will offer path out of the current economic crisis.

Analysts said the global investor confidence in Pakistan’s economy is likely to improve following the finance minister’s statement that the rupee will appreciate in the coming months due to expectations of a reduction in the current account deficit amid falling imports.

“Few bankers have confirmed to me that Pakistan has paid around US$40m coupon on its Dollar Sukuk that was due on July 31. This may provide some confidence to investors of Pakistan Eurobonds,” said Mohammed Sohail, CEO at Topline Securities in its official Twitter handle.

“Some stability is seen in currency, stock and bond market in last few days. Mainly due to substantial fall in Pakistan imports providing hope that current account deficit will come under control,” Sohail said.

Finance Minister Miftah Ismail said the improvement in the trade account due to reduction in imports will help reduce strain on the rupee. Imports fell 35 percent month-on-month to $5 billion in July.

“Pakistan has sufficient reserves to service such small payments. It is good for global investor perception but focus still remains on IMF funding,” said Fahad Rauf, the head of research at Ismail Iqbal Securities, referring to the coupon payments on Sukuk by banks.

Around half of the rupee depreciation since December 2021 can be attributed to the global surge in the US dollar, following historic tightening by the Federal Reserve and heightened risk aversion, said the Ministry of Finance and the State Bank of Pakistan in a joint press release on Sunday.

Of the remaining half, some is driven by domestic fundamentals. In particular, the widening of the current account deficit, especially in the last few months. As noted above, the deficit is expected to narrow going forward as the temporary surge in the import bill is brought under control. As this happens, the Rupee is expected to gradually strengthen, it said.

The remaining depreciation has been overdone and driven by sentiment. The rupee has overshot due to concerns about domestic politics and the IMF programme. This uncertainty is being resolved, such that the sentiment-driven part of the rupee depreciation will also unwind over the coming period, it added.

The financing needs stem from a current account deficit of around $10 billion and principal repayments on external debt of around $24 billion.

In order to bolster Pakistan’s foreign exchange reserves position, it is important for Pakistan to be slightly overfinanced relative to these needs.

“As a result, an extra cushion of $4 billion is planned over the next 12 months. This funding commitment is being arranged through a number of different channels, including from friendly countries that helped Pakistan in a similar way at the beginning of the IMF programme in June 2019.”