Karachi: Pakistan is marketing its first dollar-denominated bond since September 2015 as it seeks to pump up its foreign-exchange reserves, which have slumped 25 per cent.

The South Asian nation set initial guidance on the 10-year offering in the low 7 per cent area, according to a person familiar with the matter, who isn’t authorised to speak publicly and asked not to be identified. Pakistan is also offering a 5-year Sukuk, with initial price talk of 6 per cent. Both bonds may price today. It’s targeting a sale of as much as $3 billion (Dh11 billion), Prime Minister Shahid Khaqan Abbasi said in a text message this week.

The $284 billion economy is struggling with political and economic turmoil. The government this week capitulated to a fundamentalist group that was seeking the resignation of the nation’s law minister, while an arrest warrant has been issued for Finance Minister Ishaq Dar for failing to attend court proceedings looking into corruption charges. The nation’s foreign-exchange reserves are lower than those of smaller neighbour Bangladesh.

Dar, who is on a medical leave of absence in London, has denied any wrongdoing.

“Given financing pressures, I wouldn’t be surprised if the government prioritised size over price,” Mark Baker, a Hong Kong-based portfolio manager at Aberdeen Standard Investments, said earlier this week. Pakistan’s economic situation has become more challenging, with the fiscal- and current-account deficits widening, he said.

Signs of stress

Proceeds from the bond sale will be used for general budgetary purposes, according to the person familiar.

The government raised $500 million from 10-year bonds at a yield of 8.25 per cent in 2015, according to data compiled by Bloomberg. It also sold $1 billion of 10-year notes in 2014 at 8.25 per cent, or 557.3 basis points over US. Treasuries. While spreads on those April 2024 bonds tightened significantly last year, they have been widening in recent months, and touched 433 basis points in November, the most since January 4.

The nation’s economy is showing signs of stress, with the current-account deficit more than doubling to $14.4 billion in the year through September. Foreign-exchange reserves held with the central bank dropped by 25 per cent to $13.3 billion in the year to Sept. 30.

“Some additional premium is warranted to reflect Pakistan’s political and economic woes,” Nicholas Yap, a credit desk analyst at Nomura International (HK) Ltd. in Hong Kong, wrote in a report. Nomura recommends that investors participate with rates of at least 6.875 per cent for the 10-year bond, and 5.7 per cent for the Sukuk. “Most of the negatives have been priced in at current levels,” Yap said.

Citigroup Inc, Standard Chartered Plc, Deutsche Bank AG and Industrial & Commercial Bank of China Ltd. are managing the dollar bond offering, while Citigroup, Deutsche Bank, Dubai Islamic Bank PJSC, ICBC, Noor Bank PJSC and Standard Chartered are arranging the Sukuk.

S&P Global Ratings assigned a B rating, its fifth-lowest non-investment grade, to the bond.