LAHORE: Exporters who had opted for government bonds against their outstanding Sales Tax refund liabilities are now finding out that the bonds are worth much less than what their face value represents.

The substantially wide difference of 425 basis points between the market yields and the return offered by the government on the refund bonds issued to exporters means they face large losses should they wish to sell their debt instrument to banks.

The market yield on government debt currently stands at 14.25 per cent a year, whether on 12 month T-bills of three year PIBs, against the 10pc rate on the three-year refund bonds the government has given to exporters.

“The gap between the T-bill (market) yields and the coupon rate means that banks will discount these three-year bonds at 85.75pc of its actual value or even less,” a senior banker told Dawn.

1,000 firms availed bonds worth Rs17bn that have failed to develop a secondary market

Another banker from the treasury department of a major bank went a step further. “I am not aware of any trade of these bonds, there is no secondary market.”

The cash-strapped government has so far issued three tranches of Rs17 billion to about 1,000 exporters through the Central Depository Company (CDC) to liquidate its sales tax refund liabilities, according to an official of the company Dawn spoke to. The decision to reimburse exporters their sales tax refund claims through bonds to help them overcome their liquidity problem was made by the previous finance minister, Asad Umar.

“We have many a time approached the Federal Board of Revenue (FBR) to either increase the returns on these bonds to 15pc a year to bring it at par with the market yields or give us a discounting mechanism to recover our actual amount to save us from the losses,” says Khurram Mukhtar, a readymade garment and hometextiles exporter based in Faisalabad.

“We have all this paper sitting with the CDC and nobody knows what to do with it,” said Zubair Motiwala, a textile exporter based in Karachi.

Others tell Dawn that nobody has yet tried to sell these bonds, while bankers say they are not aware of any such sale either.

He said the small- to medium-sized exporters were faced with serious liquidity crunch because of increased working capital requirements on the back of steep currency devaluation in the recent months.

“We were hoping that we will be able to discount the bonds and raise cash to meet our working capital requirements but are unable to do so because of the potential losses on account of the difference in the going market rate and interest offered on the bonds.

These bonds are mere paper lying with CDC and of no use to us if we cannot convert them into cash for businesses,” he added.

The FBR is issuing the refund bonds to the exporters against Refund Payment Orders. The profit is payable at the end of the three-year maturity period and bondholders can sell/transfer the instrument to another person/bank/entity against any consideration or as a gift or use them as collateral for obtaining bank loans.

The bonds will be an approved security for calculating the Statutory Liquidity Reserve of the banks.

Published in Dawn, August 11th, 2019