05 December 2004	Sunday	22 Shawwal 1425

KARACHI, Dec 4: The government managed to keep its domestic debt from growing in the first quarter of this fiscal year.

What helped the government keep the growth of overall domestic debt at a mere 0.2 per cent in July-September 2004 was that its permanent debt and unfunded debt witnessed a net decline of Rs6.4 billion and Rs2.1 billion respectively. Total domestic debt only inched up to Rs1979 billion at end-September from Rs1975 billion at end-June 2004.

Data released by the State Bank show that the government borrowing through long-term Pakistan Investment Bonds, which traditionally makes up the largest chunk of its permanent debt remained negative in Q1 FY05. The government rather retired Rs5.4 billion debt raised earlier through PIBs.

Borrowing through all other instruments of permanent debt, except for prize bonds, also remained negative during this period. The government did raise Rs2bn debts through prize bonds.

Though unfunded debt saw a net decline of Rs2.1 billion in Q1 FY05, the government did manage to raise Rs20 billion through 10-year Bahbood Savings Certificates or BSCs and Rs6.6 billion through Pensioners Benefit Accounts or PBAs, also of 10-year maturity.

Whereas these two tailor-made high-yielding saving schemes raised huge amounts of debt during July-September, all old national saving schemes including 10-year Defence Saving Certificates or DSCs; five-year Regular Income Certificates or RICs and three-year Special Saving Certificates or SSCs saw a net decline in investment. People made a net withdrawal of Rs2.4 billion from DSCs and that of Rs12.7bn from RICs. They also took out Rs12 billion from SSCs.

Investment into these old special saving schemes has been on the decline because of frequent slashing of their rates of return. On the other hand, a relatively high return on specially designed BSCs and PBAs has made darling the small investors including widows and pensioners for whom these instruments were launched. The rate of return on the two 10-year schemes is 10.08 per cent, much higher than 8.25 per cent on DSCs of similar maturity.

SBP data show that whereas the permanent debt and unfunded debt saw an overall decline in Q1 FY05, floating debt did see a modest rise of Rs13.2 billion that was raised through market treasury bills.

Though total domestic debt has shown a negligible growth of Rs4 billion or 0.2 per cent in the first quarter of this fiscal year, indications are that it would grow more rapidly in the second quarter ending in December.

Figures for domestic debt growth in Q2 FY05 would be out in the third quarter, but top bankers say that the amount of debt raised through treasury bills would be much larger in the second quarter than in the first quarter. Banks have already been investing heavily in T-bills since the start of the second quarter as the central bank has stepped up tightening of interest rates to keep inflation in check.

They, however, say that the government's permanent debt would show a falling trend chiefly because it had made no borrowing through long-term PIBs in October-November andchances are that it might not sell PIBs in December as well. Last month, the SBP held an auction of PIBs but as the participants demanded higher-than-the acceptable yields, it scrapped all the bids.

This was the third auction of PIBs scrapped since the start of the new fiscal year in July to disallow long term interest rates from rising too fast. In the PIBs auction held on November 11, the market had demanded 7.75-8 per cent yield on 10-year bonds, up from their last weighted average yield of 7.13 per cent but closer to the coupon rate of 8 per cent.

The SBP had rejected all bids for PIBs signalling to the market that the government was in no need to borrow long term funds at such high rates. But the fact that the government is willing to borrow funds from international markets at equally high rates by launching eurobonds and Islamic bonds irks many senior bankers who see this in a sheer contrast to the government policy of keeping the cost of domestic credit low, even though inflation has been on the rise. Consumer inflation went up by 9.06 per cent year on year in July-November 2004, despite tightening of interest rates by the State Bank. For some bankers this indicates that the central bank needs to tighten the interest rates more aggressively.

The recently released Financial Markets Review by the State Bank supports this view. "The impact of this tightening is not too evident in credit growth," said the report referring to an 80 basis points increase in the cut-off yield on six-month bills and mopping up of Rs133.4bn through open market operations in Q1 FY05. "If this credit growth continues in Q2 FY05 and inflationary pressures do not ease, it may be desirable for the SBP to further tighten its monetary policy."

Private sector credit offtake rose to Rs146.5bn between July 1-November 20, 2004 against the full fiscal year target of Rs200 billion and up from Rs119.7 billion in a year-ago period.