24 July 2004	Saturday	06 Jamadi-us-Saani 1425

KARACHI, July 23: The International Monetary Fund on Friday urged Pakistan to make a series of major reforms to its securities markets, including changes to its national savings scheme.

It was not immediately clear how much of the proposed reforms Islamabad would adopt, although the government has indicated it will consider changes. A three-year $1.5 billion IMF aid programme for Pakistan ends this November, and the country does not plan to enter a new one.

In a report titled "Pakistan: Financial System Stability Assessment", the IMF said it was happy with Pakistan's progress toward stabilizing its economy and strengthening its external financial position.

However, the international lending agency urged Pakistan to consider selling its National Saving Scheme certificates through subscriptions or auctions, which it said would allow the government to better control the amount issued in a year.

Currently, NSS certificates are available at retail outlets throughout Pakistan, with no limits on their sale. "One alternative would be to replace existing NSS instruments with retail marketable securities sold through subscriptions or auctions rather than on-tap," the IMF said.

It also said the government should consider further aligning interest rates on NSS certificates with prevailing yields on government bonds, in order to promote development of the corporate bond market. Currently the two rates are partially linked, which allows NSS rates to be slightly higher than yields on government bonds.

Other reforms suggested by the IMF included announcing in advance an auction schedule for the sale of government bonds during each year; the IMF said this would deepen the capital market. The IMF said the money market could be further developed by promoting a market for interest rate swaps.

The report said sharp gains by the Pakistan stock market in recent years reflected "a number of factors, including improved economic growth, consumer demand, and corporate earnings; record low interest rates; high liquidity in the markets, and a better regulated and more transparent market".

It said the current level of market capitalization - $25 billion - would, if maintained, make Pakistan eligible for inclusion in the Morgan Stanley MSCI index, which should attract some renewed fund inflows from overseas.

But the report urged regulators to quickly replace "badla" financing with a system of globally accepted margin financing to reduce risks in the market. "Badla" is essentially a facility for financing share purchases offered by brokerages and banks, which allows buyers to create highly leveraged positions in the market.

"The extent of leverage...is not transparent and underlying security transactions are typically speculative. This creates scope for market manipulation and increases systemic risk," the IMF added. - Dow Jones Newswires