December 25, 2006	Monday	Zilhaj 03, 1427

WITH the resumption of auction of Pakistan Investment Bonds (PIBs), the government is sending signals to the financial sector that time has come for developing the market for fixed income securities. This revival of PIBs has coincided with the remarks of the State Bank Governor Dr Shamshad Akhtar that fixed income market development will be a key agenda of the next phase of financial sector reforms. And the director-general of the Pakistan’s Debt Co-ordination Office Dr Asfhaq Hasan Khan says that this office and the State Bank have jointly worked on the PIB auction details.

The 30-year PIB float also indicates that the government is inclined to develop long-term yield curve. The State Bank has supported the move by accepting the bidders’ offer of Rs8 billion against the targeted figure of Rs5 billion.

Bids worth Rs19.72 billion were accepted against the auction target of Rs20 billion, nearly 90 per cent of which was subscribed by corporations like State Life. The rest was picked by banks which showed strong preference to three-year bonds. Incidentally, it is the banks and financial institutions which have been demanding frequent auctions of PIBs.

PIB auctions serve the dual purpose of developing the debt market and financing of government’s fiscal deficits.

Official sources in Islamabad explained that principally, two market-based sources are available to the government to borrow money to finance its fiscal deficit or to fill its revenue gap. One is domestic and the other external. PIB relies on the domestic market for raising money.

Within the domestic debt, there are again two sources of borrowing - from the banking system and the non-banking system.

The banking system offers the options to borrow either from the central bank or from the commercial banks.

PIB is part of the banking system. The government believes there should be less reliance on the central bank so as to avoid intensifying inflationary pressures. In other words, it does not want that monetary policy to become hostage to fiscal policy. In order to move away from central bank's borrowing, PIB was the option.

Through PIB, the government encourages its institutions like the State Life Insurance and many others to buy these bonds.

Market anticipates that the government would raise about Rs40 billion during the current fiscal through PIB auctions, bulk, of which, has already been obtained.

However, a key question is whether the government would achieve its 4.2 per cent GDP fiscal deficit target by borrowing through PIBs. Independent economists reckon that it was not an easy task under the prevailing circumstances.

Former Director of Pakistan Institute of Development Economics(PIDE) Dr A. R. Kamal says that the way government understated its expenditure and failed to collect the required revenue, it was not possible to achieve 4.2 per cent fiscal deficit target set for the current financial year.

The government did not offer relief to the public despite reduction in international oil prices only to stay the course. "But still they cannot do anything and I do not see how the fiscal deficit will be contained at the end of 2006-07", he said.

Dr Ashfaque Hasan Khan says: The auction was for 3,5,10,15 and 30 years. The 30-year maturity bond is for long duration aimed at considerably delaying the debt profile of the country. "The objective is to delay quick debt servicing". These PIBs, he added, were different from $800 million worth of international sovereign bonds earlier floated, out of which $500 million were for ten year tenure and $300 million for 30 years maturity.

"But for the first time smooth yield carve has been developed to borrow Rs20 billion through PIBs, although offers worth Rs35 billion had been received", the economic advisor said.

Asked about the fiscal deficit, he said, that it was one per cent of the GDP or Rs88 billion as measured in the first quarter of the current financial year. The projected GDP fiscal deficit target for 2006-07 is 4.2 percent and in absolute numbers, it stands at Rs370 billion today.

And now for the second quarter of current fiscal, Rs20 billion has been borrowed by the government through of PIBs. "This amount will be deposited in the government's account which could be utilised some other time", Dr Khan said, adding that currently the government did not require this money.

He did not reckon that government's borrowing through banking and non-banking system was against any economic norms; it happened every where in the world. Even the developed countries borrowed from their banking systems to manage their fiscal deficits. It is a continuous process started in 2001.

Euro bonds, he said, were different and were meant to remain in touch with global investors, to tell them about Pakistan's improving economic fundamentals. These euro bonds were last launched in March 2006.

Asked why the government did not opt for borrowing Rs35 billion, he said that the purpose of the government could be served by just having Rs20 billion on which the investors will get a decent rate of return.

He also did not believe that fiscal deficit at 4.2 per cent of the GDP would be exceeded for which the government might have to resort to more borrowing from the banking system in future.

"The fiscal deficit is likely to be around three per cent of GDP during the next 4-5 years and this is not a matter of worry for us, in fact it would be good for our economy and the country", said the director general of the Debt Coordination Office.

Since the parliament had adopted a debt limitation bill, the government was very much conscious of the issue and was avoiding to incur unnecessary expenditure.

Dr Khan said that the debt burden has declined which is key reason for improvement in the credit rating by two international rating agencies — Moody's International and the Standard and Poors.

Foreign debt and liabilities today stands at $37 billion and is 29 per cent of the GDP and 120 per cent of the foreign exchange earning. "This used to be 66 per cent of GDP and 347 percent of foreign exchange earning seven years ago". Debt burden has been reduced by more than half.

About the public debt, he said, that it today stands at 56 per cent of GDP from 100 per cent seven years ago. In fact it has emerged as a role model for reducing debt by the developing countries.

He claimed that despite problems like increasing current account deficit and inflation, Pakistan's macro economic fundamentals are strong as external capital inflows continue to come, through which the government is meeting its foreign exchange requirements.