GOVT. BORROWING

EFFORTS TO DEVELOP A DEBT MARKET

AMANULLAH BASHAR
(feedback@pgeconomist.com)

July 16 - 22, 20
12

State Bank of Pakistan (SBP) has amended certain rules governing the Primary Dealer System to create a balance between privileges and obligations of banks (Primary Dealers) (PDs) to achieve the objective of development of debt market in Pakistan.

According to the amendments, all banks/DFIs interested in Primary Dealer (PD) status, will have to ensure that their charges on Investor Portfolio Securities (IPS) accounts are reasonable and in line with SBP's objective to broader the investor base of Government securities.

Primary Dealers have been instructed to provide efficient IPS account related services to customers. PDs will be eligible to claim commission @ 10 paisa per Rs 100 for all accepted Non Competitive Bids (NCBs) of individuals, employee provident/pension funds and corporate except Asset Management Companies (AMCs), Mutual Funds, Insurance/Mudarba/Leasing companies in Market Treasury Bill (MTB) and Pakistan Investment Bond (PIB) auctions. A maximum limit of Rs 250 million is placed for submitting NCB by any one investor in any one tenor of PIB/MTB auction. PDs will be required to display prices of Government Securities on Reuters, Bloomberg/EBND and at their branches.

Only designated PDs would be eligible to participate in the auctions of Government Securities. The requirement of other banks and institutional/retail investors would be covered from these PDs or from other secondary market players. PDs will be allowed to entertain Pass-through bids, but such volumes will not be counted towards secondary market performance evaluation of the respective PD. However, PDs have to submit detail of accepted pass-through bids to State Bank of Pakistan after every auction of Government securities.

BURDEN ON BANKING SECTOR

The strategy to offload deficit financing burden to the banking sector did not produce the desired results in 2012 - as the 4th quarter of the financial year 2012 in particular failed to meet the targets of Treasury Bills auction set by the government.

It may be noted that out of a combined target of Rs995billion from 7 auctions, only Rs920billion were raised by the government while keeping cut-off rates roughly flat. It is noteworthy to see that participation in the longer end of the curve increased in 4th quarter which helped cover some of the shortfall in T-bill targets. A combined Rs62.5billion worth of Pakistan Investment Bonds (PIBs) were sold against Rs40billion target while Rs78.4billion Sukuks were sold against target of Rs50 billion.

FINANCIAL CONSTRINTS

There are many factors behind the financial constraints faced by the government which should be revisited seriously to find workable solutions of the issues adding to the financial burden on the economy. Besides the low tax to GDP ratio which is a major issue primarily persists due to some privilege segments of the economy which are not contributing to the exchequer despite generating considerable amount of earnings. The most glaring example is the agriculture which has been time and again pointed by almost every citizen that instead of increasing the price of gas, electricity and POL products by levying taxes, the policy makers should develop some ways and means to bring agriculture sector into the tax net.

Apart from agriculture yet another burden on the economy are the sick government units like Railways, Pakistan Steel, PIA, WAPDA etc which are consuming national resources in a big way in the name of subsidies running in billions of rupees every month. These are some of the issues which need to be resolved without any consideration to give a sigh of relief to the inflation hit people of this country. Privatization of such state owned organization which are not a going concern is the best way to get rid of the endless financial burden on the exchequer. However the best tool for privatization of these organization would be through inviting public offerings through stock exchanges of the country. This would ensure peoples participation in the government policies as well as help capital formation to run these organizations in a transparent way on the back of involvement of shareholders in decision making. Actually doing business is not the business of the government, let these sick organization be a baby of the private sector which has the capacity to turn these organizations into profit making entities. The process of privatization would also help to attract domestic as well as foreign investment- which is the key to economic growth in any country.

INTEREST RATE LIKELY TO PERSIST AT 12 PERCENT

The key highlight of FY12 was the spike in open market operations conducted by the central bank, in order to control market liquidity and facilitate borrowing from commercial banks. From the highest injected amount of Rs85billin in Fiscal 2011, OMO injections crossed the Rs350billion mark in second quarter of fiscal 2012. The weekly OMO subsided to Rs100-150billion in 4th quarter of fiscal 2012 vis-a-vis lower accumulation in T-bill auctions.

The financial analysts were of the view that a rate hike at this stage while providing incentive to banks' to invest in government securities, will likely increase the subsequent OMO injections which itself is an inflationary form of finance.

The latest figures of government borrowing reflect the upward pressure on interest rates will likely persist, where reduction in government's reliance on central bank borrowing, which is currently standing at an al time high level, could be a challenge in the absence of external inflows.

The government borrowing touched Rs1.73trillion that is up Rs577billion compared to Rs148billion last year indicating source of borrowing is getting increasingly skewed towards central bank against scheduled banks in the country. End

However looking at the State Bank's hands-off policy in the recent monetary policy may carry a near term risk of a discount rate hike remains limited and a rate hike at this stage may have limited impact on controlling inflation.

It is believed that a possible return to IMF for a loan program after elections could act as a catalyst for interest rate hike by 50-100bps in the post election times.