KARACHI, May 5: Domestic debt grew at the rate of less than half a per cent in eight months of this fiscal year mainly due to heavy withdrawals from fixed-income National Saving Schemes (NSS). The stock of outstanding domestic debt rose from Rs1,979 billion at end-June 2004 to Rs1,988.3 billion at end-February 2005, showing an increase of Rs9.3 billion or a little less than 0.5 per cent, according to data released by the State Bank.

What contained the growth of domestic debt was that people refrained from making net fresh investment in fixed-income NSS; they rather went for withdrawing their investment with the result NSS witnessed large net withdrawals in eight months of the current fiscal year.

Net withdrawals from three most popular instruments of NSS i.e. 10-year Defence Saving Certificates, five-year Regular Income Certificates and three-year Special Saving Certificates totalled Rs70.6 billion between July 2004 and February 2005. This reduced the combined stock of the debt raised through these three schemes to Rs648 billion at end-February 2005 from Rs719.2 billion at end-June 2004. Net investment in NSS fell primarily because their rates of return had become too low for investors to make net fresh investment as a result of gradual slashing in last few years.

A big fall of more than Rs70 billion in the domestic debt raised through the above-named three schemes would have reduced overall stock of debt by a wider margin had two newer schemes not mobilized Rs58.3 billion fresh debt. The SBP data show that Pensioners Benefit Accounts and Bahbood Saving Certificates, both of 10-year tenure, attracted net fresh investment of Rs13.6 billion and Rs44.7 billion respectively. That increased the total stock of domestic debt raised through these two schemes to more than Rs104 billion at end-February 2005, from Rs46 billion at end-June 2004.

What else helped the government contain growth of domestic debt in eight months of this fiscal year was a net outflow of Rs13 billion through maturing Pakistan Investment Bonds of different tenures coupled with Rs16 billion outflow through maturity of 10-year Federal Investment Bonds.

The government had stopped issuing FIBs from 1997 and as such net reduction in the debt raised through them would continue until 2007. But in case of PIBs net outflow of Rs13 billion occurred as previously issued PIBs continued maturing during July-February 2004-05 but the government failed to sell new bonds. It made three abortive attempts during July-March 2004-05 to sell the bonds but the market was not ready to buy them at the rate the government was willing to offer.

The market is expecting a fourth auction of PIBs sometimes this month or next month and the government is likely to allow their effective yields rise from their previous levels. The government may also increase the coupon rates of PIBs either in the remaining two months of this fiscal year or in the first quarter of the next fiscal year. Increasing the coupon rates on PIBs has become necessary in the context of rising interest rates.

The government had fixed coupon rates of three-year, five-year and 10-year PIBs at 6, 7 and 8 per cent respectively in October 2003. The coupon rates on 15-year and 20-year PIBs also remain unchanged at 9 and 10 per cent respectively.

Short-term interest rates, however, have moved up since October 2003 and lately they have shown a much faster upward movement than in the past.