KARACHI, May 11: The government has managed to contain growth of domestic debt at less than four per cent in first nine months of this fiscal year. This is going to reduce the overall cost of domestic debt thus freeing up more fiscal space for the government in the next federal budget. The budget for fiscal year July/June 2004-05 will be presented in June.

Official statistics reveal that net domestic debt grew by only Rs67.7 billion or 3.6 per cent to Rs1921.3 billion in nine months to March 2004. What helped the government contain growth of domestic debt at such a low level was that people made huge withdrawals from some of the National Saving Schemes or NSS.

Data released by the State Bank show that people withdrew Rs35.1 billion from five-year Regular Income Certificates or RICs and Rs10.2 billion from three -year Special Saving Certificates or SSCs. They also made Rs1.7 billion net withdrawals from Saving Accounts.

These withdrawals from NSS kept the inflow in overall unfunded debt at minus Rs10.8 billion though the government raised Rs13.3 billion through Bahbood Saving Certificates and Rs11.2 billion through Pensioners Benefit Accounts.

Defence Saving Certificates or DSCs also netted in Rs3.8 billion debt and under the postal life insurance and GP fund schemes the government raised another Rs7.4 billion.

Whereas overall inflow in unfunded debt remained negative in nine months to March 2004 the government saw a buildup of Rs18.8 billion in floating debt. The government retired Rs12.7 billion debt acquired earlier through market treasury bills but it had to borrow Rs31.5 billion through treasury bills specially created by the central bank for this purpose.

In other words the government borrowed heavily from the State Bank to retire expensive credit it had earlier raised through market treasury bills when T-bills rates were high.

In nine months to March 2004, the largest increase of Rs59.7 billion was seen in the permanent debt that is raised primarily through bonds: the government raised Rs 54.8 billion through long-term Pakistan Investment Bonds or PIBs and Rs19 billion through prize bonds.

Senior bankers say a substantial investment of Rs19 billion in prize bonds within nine months point to the fact that falling returns on bank accounts and on NSS made these bonds attractive.

In nine months to March 2004, the government twice slashed the rates of return on NSS - first in July 2003 and then in January 2004. During this period the weighted average rate of return on bank deposits also fell from 1.90 to 1.30 per cent.

Statistics show that except for PIBs and prize bonds all other instruments of raising permanent domestic debt saw a decline in investment. And not only the inflows in PIBs and prize bonds outmatch the inflows in other instruments the stocks of debts raised through them also forms substantial part of domestic debt.

At Rs283.5 billion the stock of debt raised through PIBs till March 2004 was more than 14.7 per cent of the total domestic debt of Rs1921.3 billion. Similarly the debt stock of Rs149 billion raised through prize bonds was 7.7 per cent of the total domestic debt.