AT long last, the government has managed to deliver on its promise made in January to exporters that the sales tax refunds they are owed will be paid in the form of bonds that carry a return, are encashable, transferable and can be collateralised. The promise was made in the days when the finance bill amendment was introduced — but it has taken several months for the government to actually deliver on it. The first refunds of about Rs7bn have finally been paid through these bonds, while hundreds of other applicants are in the queue and an additional amount of Rs45bn is in the pipeline awaiting disbursement. In time, this figure is clearly set to rise, and given the looming withdrawal of exemption from sales tax for the export-oriented sectors, it seems that the government’s recourse to these bonds will increase massively. If the figures put out by the exporter community are anything to go by, hundreds of billions of rupees in outstanding refund claims might end up being settled through these bonds, while hundreds of billions more will accumulate annually if the zero-rating regime is withdrawn as is being reported.

What exactly will these bonds be worth in the market? At present, they carry a negative real return of 10pc per annum paid out on maturity after three years, so the returns cannot possibly be the purpose for holding on to them. The only other thing giving any value to these bonds is that banks can use them to meet their Statutory Liquidity Reserves ratios, though how keen the banks are for this remains to be seen. They will likely sell at a steep discount in the market, and as more and more of them are issued, the discounts are likely to get steeper and steeper, because it is doubtful if the banks would have an unlimited appetite for them. Having started this scheme, it would be key to know when to end it. It will be tempting for the government to keep on using these bonds to settle refund claims, but at some point in time, the issuance of these bonds will start having a monetary impact, as well as consequences for debt management and disclosure. Recourse to such midway measures that appear fiscally neutral in the beginning should be limited, and discipline will be required to resist temptation and to end the scheme quickly.

Published in Dawn, June 3rd, 2019