ISLAMABAD: State Bank of Pakistan (SBP) has set strict conditions for $ 200 million ADB Pak Rupees-linked bonds which will be sold only to non-resident investors, well-informed sources told Business Recorder.

Finance Division sources revealed that Pakistan joined Asian Development Bank (ADB) as a founding member in 1966. Since then, the cumulative loan and grant disbursements by ADB to Pakistan have amounted to $ 25.18 billion. The bank’s country operations business plan 2020-2022 for Pakistan indicates $ 7.1 billion in assistance, including: project loans; policy-based lending for structural reforms; multi-tranche financing facilities for energy, transport, water, and results-based lending for energy and social services. In addition to development assistance to the Government of Pakistan, ADB further intends to increase its private sector operations through local currency finances, for which it has proposed: (i) issuance of Local Currency Bonds (LCB) for resident investors, and (ii) Offshore Pakistan Rupee (PKR)-Linked Bonds for non-resident international investors.

According to sources, Finance Division has held stakeholders consultations with State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), and Federal Board of Revenue (FBR).

The stakeholders have consented on ADB’s issuance of Offshore PKR-Linked bonds. It was stated that an offshore currency-linked bond is an international bond which is valued in one currency and repaid in another at prevailing Foreign Exchange (FX) spot rate. These bonds use local currency interest rate as an anchor to attract investors. To hedge currency risk, investors pay and receive USD (or any other currency of choice) to participate in link bonds. Coupons are benchmarked to local currency interest rate prevailing in domestic debt market. Cash-flows are linked to performance of the underlying currency. Offshore currency linked bonds are structured like Eurobonds with similar structure, documentation, listing and distribution protocols. ADB has issued offshore currency-linked bonds in Indian Rupee, Brazilian Real, Turkish Lira, South African Rand etc. For offshore PKR-linked bonds, ADB will convert the proceeds into local currency and will use it for its private sector operations in Pakistan. ADB will buy PKR from onshore FX spot market through standalone FX spot conversion thereby providing FX liquidity in local market. For payment of principal and interest to the bond investors, ADB will re-convert PKR into USD in the same onshore FX spot market. While agreeing to the proposal, SBP has placed a cap of PKR 25 billion on ADB’s Offshore issuance. FBR has confirmed tax exemptions to ADB under the Income Tax Ordinance 2001 and ADB Charter ratified by the Government of Pakistan.

Finance Division recently proposed to the ECC that owing to the emergent requirements for finances in the post-COVID economic scenario, Government of Pakistan may give its consent to ADB’s proposal for issuance of Offshore PKR-Linked Bonds. This will help promote private sector investments, and increase local currency operations by ADB, thereby injecting foreign exchange into local currency spot market.

Finance Division requested the ECC for allowing ADB to issue Offshore Pakistan Rupee (PKR) Linked Bonds for international investors subject to completion of all codal formalities.

During the ensuing discussion, the Governor, State Bank of Pakistan supported proposed PKR-linked bond programme of ADB. He informed the meeting about the terms and conditions suggested by SBP for the said programme as under: (i) the programme will be restricted to maximum $ 200 million;(ii) ADB will ensure that PKR linked bonds are sold to non-resident investors only and not funded via any source from Pakistan ; (iii) ADB will bring the bonds proceeds in Pakistan and use for long-term project financing of three or more years in the priority sectors such as Infrastructure, Housing, Sustainable Energy, Health, Education (including vocational training), Agriculture and livestock (including supply Chains), and Microfinance banks & institutions;(iv) lending to Leasing / Mudarabah companies, commercial/specialized banks will only be permitted if the funds are used for onward lending to priority sectors ;(v) in Pakistan, the USD proceeds of the PKR linked bonds must be kept in PKR;(vi) ADB may buy/sell foreign exchange in the spot market based on their underlying, exposure like conversion of bond proceeds into PKR and repatriation of payment’s to bond holders. FX forward transactions and swaps will not be allowed for any purpose. Moreover, all FX activities of ADB must be routed through authorized dealers in Pakistan and must be backed by underlying transactions; (vii) for liquidity management, ADB may open deposit/securities accounts in Pakistan and lend or borrow (including repo/reverse – repo) in PKR to/from local financial institutions up to maximum tenor of three months. However, SBP will not enter into repo/reverse repo transactions with ADB. Further, ADB may also buy/sell PKR denominated marketable government securities of all tenors;(viii) ADB would not ask for repayment of existing FCY loans given to clients in Pakistan for the purpose of conversion of same into PKR under the proposed bond program;(ix) ADB would provide all requisite data to SBP to substantiate compliance to the terms of the approval, as and when requested by SBP;(x) ADB will seek approval from the Federal Government as required under Article of Agreement for establishing ADB and ;( xi) ADB shall approach SBP with complete details of the PKR linked bond program and its usage mechanism before issuance. More exemptions may be required once ADB shares further details of the program.

SECP and members of the ECC also supported the proposed PKR-linked bond programme.

The Economic Coordination Committee (ECC) of the Cabinet considered the summary of July 13, 2020 submitted by the Finance Division regarding ADB Offshore Pak Rupee linked Bonds and approved, in principle, the proposal with the direction to Finance Division to: (i) follow terms and conditions as suggested by the SBP for the proposed PKR linked bond programme and (ii) resubmit the case to the ECC for consideration, before launching of the proposed programme.

Copyright Business Recorder, 2020



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