Amir Saeed

Circular debt is the main reason behind Pakistan’s economic crisis, and the Power Division can effectively tackle it by issuing Sukuk bonds without encountering any financial liability, opine experts during an interaction with WealthPK. Tariq M. Pasha, former non-executive director on the Board of Directors of the State Bank of Pakistan, told WealthPK that Sukuk bonds offer the banks more options to invest their excess liquidity in high quality liquid assets (HQLA). Sukuks can also act as collateral for repos. Government Sukuks are also available in countries like the UAE, Saudi Arabia, Qatar, Malaysia, Bahrain, Turkiye, Bangladesh, Oman, Nigeria, and Indonesia. It is required to issue domestic and international Sukuks against unencumbered assets of the government. Speaking to WealthPK, Ahmed Ali Siddiqui, Director at IBA Centre for Excellence in Islamic Finance, said Sukuk bonds give short-term stability by raising low-cost debt from non-bank and retail investors, delimiting foreign borrowings.

“The total public debt of the federal government increased by 17.8% in January 2024 compared to January 2023. The federal government’s domestic debt has increased by 24.1% from Rs34.3 trillion in January 2023 to Rs42.6 trillion in January 2024 and the circular debt is over Rs5.7 trillion. Out of total domestic debt, the long-term public debt was Rs34.1 trillion in January 2024 as against Rs27.5 trillion in January 2023, while the short-term debt was Rs8.37 trillion, which was Rs6.69 trillion in January 2023,” he added. Speaking to WealthPK, Muhammad Abdul Aleem, Independent Director on the Board of Meezan Bank, said issuance of Sukuk will help prop up the economy’s reserves amidst a sharp widening of the current account deficit and will help lower the cost of borrowing, as the cost of Sukuk is lower than other financial securities and a comprehensive diversification will increase subscription in government securities.

Pakistan issued $1 billion worth of Sukuk bonds in 2022 in the international market at a 7.95% interest rate for seven years. “Sukuk earnings can be used to sponsor projects of alternative energy, pollution prevention and control, biodiversity conservation, water conservation and management, and infrastructure development. The proceeds can also be directed towards projects that focus on access to essential services and SME financing and employment generation. “They can also be utilized to finance short-term projects. This will help the government control the current account deficit by relying less on the international financial institutions and generating low-cost debt raised from its public and local investors and foreign investors,” he emphasized.

Credit: INP-WealthPk