KARACHI, July 10: The domestic debt of the government grew by only 6.25 per cent in eleven months of fiscal year 2003/04 as heavy withdrawals took place from some of the National Saving Schemes or NSS.

Data released by the State Bank shows that domestic debt rose from Rs1,854 billion at end-June 2003 to Rs1,969 billion at end-May 2004 depicting an increase of Rs115 billion or 6.2 per cent. Major instruments of debt raising included (1) Pakistan Investment Bonds or PIBs (2) Special Treasury Bills or STBs (3) Prize Bonds or PBs (4) Bahbood (Welfare) Saving Certificates or BSCs (5) Pensioners' Benefit Accounts or PBAs (6) Postal Life Insurance (7) Defence Saving Certificates or DSCs; and (8) General Provident Fund or GPF.

The government raised Rs95.7 billion through PIBs and Rs39 billion through specially created treasury bills. The government had initially targeted to borrow only Rs15 billion through PIBs in 2003-04 but it had later enhanced the target five times to Rs75 billion. The actual borrowing of Rs95.7 billion in eleven months to May 2004 shows the increasing dependence of the government on PIBs for mobilizing domestic debt. It also shows rising market appetite for the long-term bonds. But in the absence of official data showing the ownership of the bonds, it is difficult to say whether the bonds have become more popular with the corporates or they are still the darlings of the banks wallowing in excess liquidity.

Bankers say several banks continue to hold the bulk of the sold stocks of PIBs despite repeated warnings from the State Bank. When the banks sit on large stocks of PIBs it not only defeats the basic purpose of using these bonds to raise debt from the secondary market but also creates a maturity-wise mismatch in their own assets and liabilities. The reason is that most banks do not have enough long-term deposits to support their holdings of PIBs that are available in three-to-twenty-year tenures.

Bankers say that by raising Rs39 billion debts through specially created treasury bills in eleven months to May 2004, the government has shifted its liability from commercial banks to the SBP. It is the central bank that creates special T-bills called market treasury bills for replenishment for the government to lend money to it, when the government is in no mood to raise debt from commercial banks through TBs.

The government does this to keep its commercial borrowing in check or when it feels that the commercial banks are going to demand higher yields on treasury bills. The government borrowing through specially created T-bills by the central bank is normally cheaper.

For borrowing through prize bonds, the original target was set at Rs15.6 billion for the outgoing fiscal year but actual borrowing of Rs20.5 billion in eleven months to May 2004 has led the government scale it up to Rs27.5 billion. Since prize bonds zero risk and offer fabulous prizes to the winners, they stand out as an attractive source of raising debt from household and corporate investors as well as speculators.

Bahbood (Welfare) Saving Certificates, designed for widows and Pensioners Benefit Accounts tailored for pensioners of government and semi-government organizations as well as for senior citizens are generating enough investment as they do offer a handsome rate of return. Between July-December 2003, these 10-year instruments offered 11.04 per cent annualized return. The rate was reduced to 10.08 per cent for January-June 2004 and the same rate is applicable for July-December 2004. This is the highest rate of return being offered by the government on National Saving Schemes and competes with the average dividend income from investment in good stocks.

Ten-year Defence Saving Certificates that were once the most popular instrument of saving for the retired and the old have become less charming due to frequent slashing in their rates of return. That is why the government managed to raise only Rs3.6 billion through these certificates in eleven months to May 2004, against the original full fiscal year target of Rs11.7 billion.

In July/May 2003/04, the government also managed to raise Rs6 billion through Postal Life Insurance and Rs1.8 billion through net contributions made towards General Provident Fund. But during the same time it saw big withdrawals from some instruments of National Saving Schemes including five-year Regular Income Certificates and three-year Special Saving Certificates. People took out a large amount of Rs56 billion from the two schemes primarily because the repeated slashing on their rates of return to align the same with the yield on PIBs.

The government also made a net retirement of Rs10.7 billion debt raised earlier through market T-bills. A reduction of Rs11 billion also took place in the government's domestic debt through maturity of Federal Investment Bonds or FIBs that are being phased out. Various other instruments of domestic debt also saw smaller withdrawals in eleven months to May 2004. The cumulative impact of all these withdrawals was that net expansion in domestic debt was reduced to Rs115 billion.