KARACHI, Sept 18: The government aims at raising Rs50 billion local currency debt through long term Pakistan Investment Bonds in the next quarter chiefly to drain out excess liquidity from the banking system and stabilize interest rates.
The State Bank announced on Thursday that it will sell these bonds in three instalments. It will sell PIBs worth Rs25 billion in October; Rs15 billion in November and Rs10 billion in December. The central bank also slashed the coupon rates on PIBs by one percentage point in each case to 6 per cent for three years; 7 per cent for five years and 8 per cent for ten years. The SBP announcement put to rest all speculations about the delay in issuing notice to banks for holding a PIB auction due this month.
The announcement terms the Rs50 billion PIBs as a jumbo issue and one can infer easily that this is nothing to do with the 15- year PIBs that the government has been working on and may launch later this year.
At the same time the State Bank also reminded banks through a circular that small institutional investors will be allowed to participate directly in PIBs auction instead of the banks bidding on their behalf. Such investors can submit bids for the bonds up to 10 per cent of the pre-announced amount of the sale target.
Top bankers say these moves are going to help banking system in several ways. Says the chairman of Pakistan Banks Association Mr. Zubyr Soomro: “These larger issues (of bonds) make much more sense in terms of encouraging the market development,” he said when reached by Dawn over telephone. He said the move to allow institutional investors to participate directly in the auction would “widen competition and encourage development of secondary market by introducing more players.”
“These are healthy moves for the system,” said Mr Soomro when asked to comment on the cut in coupon rates of PIBs well timed with the launch of a jumbo issue—apparently aimed at removing interest rates distortions. He said this was something the PBA was itself advocating in its discussions on market development.
Central bankers say the jumbo issue of PIBs would help the government shift focus from raising short-term to cheaply priced longer term debts—and from foreign currency to local currency borrowing.
A senior government official told Dawn that the ministry of finance would soon be writing to the international financial institutions intimating them that Pakistan intends to pay off part of their debt before time. The government plans to pre-pay one billion dollar worth of debts of the IMF/World Bank/ADB, etc., in this fiscal year besides remaining current on other foreign debt payments that would fall due.
MARKET IMPACT: Senior bankers said the announcement about the jumbo issue of PIBs had an instant impact on the inter-bank market where the yields on existing PIBs went up by up to half a percentage point.
They said the yield went up from 5.15-5.20pc to 5.50 per cent on 10-year bonds and from four per cent to 4.25-4.50 per cent on five-year bonds.
If this sentiment continues through the time of Rs25 billion PIBs auction due on October 4 the yield on all three tenors of the bonds will rise substantially.
This should narrow the gap between the rates of return on NSS (national saving schemes) and cut-off yield on PIBs to which the same are linked.
GOVT. VIEW: That is important from the government’s viewpoint because the IMF has been criticising it for failure in removing the premium on NSS rates over PIBs cut-offs and the government has been reluctant in making too deep a cut in the NSS rates for various reasons.
Higher yields on PIBs will also narrow the gap between them and the average rates of return on bank deposits of similar maturity which again is viewed by the IMF as an implicit subsidy to NSS investors.
NON-COMPETITIVE BIDS: The State Bank has reminded the banks that in PIBs auction the bids worth 10 per cent of pre-announced auction target in each tenor of the bond is treated as non- competitive bids. “The facility is intended to accommodate retail and small institutional investors in Pakistan Investment Bonds,” said a circular issued to all banks on Thursday. It laid down the following modus operandi for tendering and acceptance of such bids:
* The non-competitive bids will be sent to SBP separately from the normal bids before auction time with the name and amount of investors without quoting price through primary dealers.
* Investors will be allowed to submit one bid in one tenor.
* The non-competitive bids will be accepted at weighted average yield in each tenor.
* In case of over-subscription non-competitive bids will be accepted in order of lowest to highest amount.