ISLAMABAD: As the International Monetary Fund (IMF) has finally called its executive board’s meeting on January 28, Pakistan started the process for launching of over $1 billion Islamic Sukuk Bond, with unchanged B3 (stable) rating by Moody’s Investor Service.

The expected inflow of more than $2bn over the next couple of weeks through two transactions — IMF disbursements and Sukuk Bond — is likely improve the country’s foreign exchange reserves for now and contain the exchange rate depreciation. The international debt market, however, remains under pressure that can entail relatively higher pricing and hence a tricky choice for the country’s economic managers to go for higher proceeds.

The IMF on Tuesday announced on its website that its executive board would meet on January 28 to consider Pakistan’s “requests for waivers of non-observance of performance criteria and re-phasing of access” to IMF funds, “sixth review” for revival of $6bn Extended Fund Facility (EFF) and “Article-IV consultations”.

IMF to take up sixth review of $6bn programme on 28th; Moody’s, Fitch maintain rating

The government has completed all the five prior actions it had committed to the global lender last month to revive its 39-month reform programme suspended since April last year, including approval of the mini-budget and State Bank of Pakistan Amendment Act by parliament. The completion of the review would lead to disbursement of about $1.059bn to Pakistan (equivalent of SDRs750 million), bringing the total disbursement under the $6bn EFF to about $3.027bn.

Authorities have, however, missed a series of performance criteria that require IMF waivers to get the programme back on track. In the process, the disbursement schedule and tranche size would have to be readjusted for the remaining approved allocation of about $3bn. Pakistan has to ensure repayment of more than $8.6bn during the remaining part of the current fiscal year ending June 30, 2022.

The officials are reluctant to comment on the Sukuk transaction under an agreement with book runners and financial managers that bars the Pakistani authorities (the client) from making any public comment until a final call to accept bids, pricing and size of the bond.

The joint lead managers and book runners — Dubai Islamic Bank, Standard Chartered Bank, Credit Suisse and Deutsche Bank — have already started the process of marketing the bond and expected to begin book-building for the transaction. Depending on the market response, the transaction is expected to be completed in a week.

Sources said the government was targeting the seven-year dollar-denominated international Islamic product through Pakistan Global Sukuk Programme Company (special purpose vehicle or SPV) by pledging a couple of motorway projects owned by the National Highway Authority.

Meanwhile, two leading international rating agencies — Moody’s and Fitch Ratings — also issued fresh but unchanged ratings for Sukuk Bond. The authorities have set an inflow of about $3bn from the international capital market during the current fiscal year.

In a statement issued on Tuesday, New York-based Moody’s Investors Service said it had assigned a B3-backed senior unsecured rating to the proposed US dollar-denominated trust certificates (Sukuk) issuance by the government of Pakistan through Pakistan Global Sukuk Programme Company Limited (PGSPCL). The SPV is wholly owned by the GoP and its debt and trust certificate issuances are ultimately the obligation of the state, Moody’s said. The assigned rating to Sukuk mirrors the GoP’s current issuer rating. The trust certificates will constitute direct, unconditional and unsubordinated obligations of the GoP, it added.

Fitch Ratings — another New York-based rating agency — on Tuesday maintained sovereign global Sukuk certificates’ rating at ‘B-’. It said PGSPCL was a legal entity in Pakistan and the issuer and trustee of Sukuk, incorporated primarily for the purpose of participating in the Sukuk transaction. It is wholly owned by Pakistan.

The rating 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 agency added.

Moody’s said the payment obligations represented by the securities to be issued by the PGSPCL rank pari passu with all of the government’s current and future senior unsecured external debt. “Proceeds from the Sukuk issuance will be used by the company to purchase assets from the National Highway Authority,” it said, adding that the amount would subsequently be used for general budgetary purposes.

Moody’s said Pakistan’s B3 issuer rating was underpinned by its relatively large economy and robust long-term growth potential, as well as ongoing reforms that may strengthen policy effectiveness over time. “Credit challenges include structural constraints to export competitiveness, the government’s high debt burden and a narrow revenue base that reduces fiscal flexibility and weakens debt affordability, as well as political risks that can influence the reform trajectory,” it added.

It said Pakistan’s environmental, social and governance (ESG) credit impact score and governance score were termed Highly Negative, reflecting high exposure to risks and weak governance profile. It said rating could improve with fiscal reforms, higher revenue base and debt affordability. Downward pressure on the rating would stem from renewed deterioration in Pakistan’s external position, including through a significant widening of the current account deficit, rise in debt burden and erosion of foreign exchange reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks.

Published in Dawn, January 19th, 2022