September 24, 2003	Wednesday	Rajab 26, 1424

KARACHI, Sept 23: The government raised more than Rs70 billion local debt through sale of long-term Pakistan Investment Bonds in fiscal year July/June 2002/03 against the initial target of Rs25 billion.

Senior bankers say what forced the government to increase its borrowing through PIBs to this extent was a one-time big auction of Rs30 billion bonds towards the close of the last fiscal year.

The government did this to increase the yield on these bonds that serves as a benchmark for determining the rates of return on national saving schemes. But generally the government borrowing through PIBs overshot the target because it helped the government retire more expensive debt secured through national saving schemes in the past.

Government sources say that Rs25 billion target set initially in the last year budget for borrowing through long-term bonds was indicative in nature. “It was an indicative target and sticking to it or not depended on several other things,” said an official of the ministry of finance contacted by Dawn over telephone in Islamabad. He admitted that in the end-June auction of PIBs the target was set at Rs30 billion plus to improve the yield so that the government might not have to lower the rates of return on NSS by a big margin to bring them closer to the yield on PIBs of similar maturity. The government was under pressure from the IMF to keep the rates of return on NSS and the yield on PIBs at par.

The government is still under pressure from the IMF to keep the rates of return on NSS at par with the yield on PIBs and the rates of return on bank deposits of similar tenures. Bankers say it is against this backdrop that the government is going to sell Rs50 billion PIBs in the next quarter at a lower coupon rate in all the three tenures.

Bankers say the mere announcement of the Rs50 billion auction of bonds in next quarter has started improving the yield on existing PIBs in their trading in secondary market trading. They say the most popular 10-year bond is now yielding 6.40 per cent annualized return adding that it is likely to rise further. They say if in the next three auctions of the bonds due in October, November and December the yield on 10-year bonds rises and the weighted average of comes to 7.5 per cent or so it would give the government some relief.

“Because in that case the gap between this and the return on 10-year DSC would be just one per cent (DSCs currently offer 8.5 per cent return),” said treasurer of a local bank. “Then the government will be able to bring the rate of return on 10-year DSC at par with the 10-year PIB because this would mean only one percentage point cut.”

Government officials realize that making even one percentage point cut in DSC from January next year would not be easy — and it would invite public wrath. In the last revision of rates of return on NSS the government had to make the deepest cut of 1.53 percentage point in the return on 10-year DSC bringing it to 8.5 per cent. This continues to attract public criticism on the one hand and on the other it has also fell short of the IMF demand.

Even after a 1.53 percentage point cut effective from July 1 the return of 8.5 per cent on 10-year DSC and the last cut-off of 10-year PIB was 2.83 percentage point. Bankers say the government can flatten this difference (as demanded by the IMF) by improving the cut-off yield of the 10-year PIB on one hand and by lowering the return on DSC on the other. Whereas the first thing can be done by making some market-based moves like announcing a large auction of PIBs on lower coupon rates and by keeping the market in shape to bid accordingly the later cannot be done smoothly.

Bankers say that the public criticism regarding falling rates of return is genuine because of sharp cuts in rates of return on NSS after every six months. They also admit that the rates of return on bank deposits is also too low to compensate the savers adequately. “But the real issue is the liquidity level,” says head of a large local bank. “If a high liquidity level persists banks will not be able to improve the deposit rate,” he said.