ISLAMABAD: The federal cabinet has reportedly given the Treasury a one-time umbrella license to borrow commercial loans from international capital markets via Eurobonds and Sukuks under Global Medium-Term Note (GMTN) programs, although the Attorney General and the Judiciary describe “umbrella approval” as legal unsustainable, according to well-informed sources business recorder.
The Treasury told the Cabinet that the Pakistani government has been raising funds through various external sources, including through the issuance of Eurobonds and International Sukuk on the international capital market, to support the fiscal and balance of payments position. These international issuances were of great importance to Pakistan as they provided access to foreign resources to build up the country’s reserves, thereby paving the way for exchange rate stability.
The Treasury maintained that international capital market transactions were traditionally conducted on a stand-alone basis.
The preparation and execution of a stand-alone capital markets transaction took approximately three to four months due to the need to engage the services of multiple agents such as financial advisers, local and international legal advisers, paying and listing agents under the Government Procurement Regulations 2004. Quite often time in initiating and completing a transaction meant that favorable capital market conditions were missed.
Taking into account the restrictions on standalone transactions, a “Global Medium-Term Note (GMTN) Program” was launched for the first time in March 2021 with the approval of the Federal Cabinet for a period of one year.
Ex Post Facto Approval Granted: $4 Billion Foreign Business Loans Tax Free
The GMTN program enabled Pakistan to tap the market in the short term and the government had raised US$2.5 billion in April 2021 and US$1.0 billion in July 2021 through the same program. Similarly, a Trust Certificate Issuance (TCI) program for international sukuks was established in January 2022 and the government raised $1.0 billion.
According to the Treasury Department, approval from the federal government to set up these programs was initially obtained for a period of one year, however, as the Eurobond GMTN program would expire in March 2022 and the International Sukuk TCI program in January 2023, there was a need for permanent Expansion to tap the international capital market in time for its financing needs.
Cabinet approval was sought under Rule 16(1)(d) of the 1973 Rules of Procedure to allow the Treasury Department to: (i) renew/extend the life of the GMTN programs (if required); (ii) establish a new program and raise funds for it; and (iii) issue Eurobonds, Sukuks or other international bonds under GMTN programs from time to time.
During the discussion, questions were asked about the difference in interest rates on commercial loans versus bilateral/multilateral loans. It was clarified that this was not an appropriate comparison as the terms were different and the commercial loans had no terms.
The Minister of Law and Justice, Dr. Farogh Naseem pointed out that granting an umbrella license for commercial borrowing was not legally tenable as the powers of the federal government could not be delegated.
Finance ministers explained that due to the short window available for decisions in capital markets transactions, it is not possible to obtain prior Cabinet approvals every time. These cases would; however, be submitted to the Cabinet for subsequent approval.
After extensive discussion, the cabinet approved the proposal once on the following points: (i) renewal/broadening of the tenor of the GMTN programmes; and (ii) issue Eurobonds, Sukuks or other international bonds under the GMTN programs.
Copyright Business Recorder, 2022
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