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Rs4 trillion bonds may deal a blow to economy

Rs4 trillion bonds may deal a blow to economy

KARACHI: The high-yielding long-term Pakistan Investment Bonds (PIBs) could deal a blow to the economy as volume of bonds crossed Rs4 trillion on March 31, the State Bank reported on Friday.

Since the installation of the Nawaz government in 2013, the long-term bonds were made a leading instrument to raise funds, but it could prove lethal to economy as size of debt servicing during the last two years increased rapidly.

As over-dependence on PIBs hurts, and borrowing piles up domestic debt, it cripples the banking system, compromising its capacity to serve as an important institution for development of economy.

In January last, the State Bank reported that the government issued PIBs worth Rs2.305tr during January 2014 to January 2015. In the 12 months, the PIBs’ growth jumped by 68 per cent.

This unusual strategy of borrowing changed the monetary system and started a race among banks to invest maximum in the PIBs.

The SBP reported on Friday that the banks hold 70.4pc (Rs2.818tr) of PIBs till end of March, 2015. The rest of the PIBs were bought by insurance companies, funds and other corporate companies.

The huge investment by banks practically left no room for the private sector while the banking has been surviving on weekly injections by the State Bank.

The State Bank on Friday injected Rs947bn in the banking system for seven days while the amount had been increasing each week.

A latest report of a brokerage house showed that the banks earned Rs158.22bn profits in 2014 as compared to Rs107.8bn in 2013.

The banks’ rising profits are the direct outcome of government’s debt servicing. Another report of State Bank said the government had to pay Rs746bn as debt servicing during July-Jan FY15.

The amount could easily cross Rs1.2tr in the remaining five months, a huge burden on economy struggling to contain its fiscal imbalances.

To contain the fiscal deficits, the government used to cut development expenditures casting negative impact on economic growth. Interest payments on domestic debt have shown year-on-year growth of 18.2pc.

At the end of December, the IMF released documents which showed that Pakistan’s consolidated Public Sector Development Programme has been trimmed to Rs917bn instead of Rs1.175tr allocation in the budget for FY15. The cut in the PSDP is the outcome of government’s effort to keep fiscal deficit at 4.8pc of the GDP.

Although the interest rate during the last five months was slashed from 10 to 8pc, its impact on debt servicing is not visible.

The government could benefit from the low interest as its interest repayments will reduce, but the long-term bond of high yield and rapid accumulation of domestic debts would not allow it to benefit from the low interest rate scenario.

Published in Dawn, April 12th, 2015

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