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Current Affairs

Pakistan raises money through Islamic bonds

Date: 28 January 2022 Tags: Miscellaneous

Issue

A $1 billion loan has been raised by cash-strapped Pakistan by issuing Islamic bonds at a record 7.95% interest rate.

 

Background

Pakistan’s economy is on a decline since last half a decade, forcing it to obtain loans from friendly countries and institutions to stay afloat.

 

Details

  • The country has been forced to pledge a portion of the Lahore-Islamabad Motorway as an asset in return for the loan.

  • The Sukuk bond will be for a period of seven years and the rate is almost half percent higher than even the 10-year Eurobond floated last year.

  • Some major foreign loans’ repayments are due in the next few months and loans are needed to keep the official foreign exchange reserves at their levels.

 

Pakistan’s economic woes

  • Pakistan’s current account deficit is said to remain in the range of $6.5 billion to $9.5 billion in the current fiscal year.

  • The country was forced to go to international capital market after spending $2 billion out of the $3 billion it obtained from Saudi Arabia.

  • The Islamic bond is backed by an asset that attracts less interest rate. This is the major difference with Eurobond.

  • The rate is the highest Pakistan has ever paid in its history on an Islamic bond. This shows the level of desperation to stay afloat.

 

Islamic bonds

  • Also known as Sukuk, these bonds are Sharia-compliant financial instruments that return profits to the shareholder instead of interest.

  • Sukuk bonds are designed in such a way that they do not invest in assets that are not permissible under Islamic law such as alcohol, pork, gambling etc.

 

Long-term bonds

  • These are long-term financial instrument that come with a maturity period of between 10 years and 30 years. They usually pay higher interest rates.

  • These bonds are preferred more over short term bonds due to their longer maturity and no conditions attached.