Bonds Market Developme nt and current affairs in Pakistan

Presented to : Sir Sharique Ayubi

[12.12.2011]

Presented by Sidra Ahmed M.UmerRashid Hasan Iqbal

Table of Contents
Table of Contents........................................................................................................ 2 Debt Market................................................................................................................ 3 Bond Market Development in Pakistan........................................................................3 History..................................................................................................................... 3 Bond market in Pakistan..........................................................................................4 Current status and Overview.................................................................................4 Development of Bond Market in Pakistan 9 points.................................................5 Hindrances in development of Bond Market.............................................................8 Pakistan's bond market on a rising trend.....................................................................8 Pakistan Government Bond 10Y Trend......................................................................10 Pak external debt mounts to $58.39b........................................................................10 External aid flows likely to materialize.......................................................................11 Money markets remain stable in July-Feb FY11..........................................................12 Bibliography..............................................................................................................13

Debt Market
The debt market is a market for trading the debt instruments like TFCs, Bonds, T-Bills, Commercial Papers, Participation Term Certificate, Corporate and Federal Bonds etc. A debt market establishes a structured environment where these types of debt can be traded with ease between interested parties. The debt market, often known by other names, based on the types of debt instruments that are traded in that market. In the event that the market deals mainly with the trading of municipal, corporate and Federal bond issues or National Savings Bond, the debt market may be known as a bond market. If mortgages and notes are the main focus of the trading, the debt market may be known as a credit market. When fixed rates are connected with the debt instruments like Fixed Income Securities, the market may be known as a fixed income market. If TFCs are trading in the market, the market would be known as TFC Market. The bond market in Pakistan covers debt and debt like securities issued by the government, statutory corporations and corporate entities. The market is regulated under the Regulation Governing Bonds Automated Trading Regulations. The SECP has identified the development of a vibrant debt market as one of its key focus areas. Based on the recommendations of a Review Committee, the Bonds Automated Trading System (BATS) is currently being re-vamped.

Bond Market Development in Pakistan

History
Prior to 1990, Federal and Provincial Governments used to borrow on tap instruments with predetermined rates. The main thrust of Federal Government borrowing was through captive funding. Large statutory preemptions and borrowing from SBP at highly concessionary rates enabled the Government to finance its large fiscal deficits. In such an environment the only tool available to counteract was to makes successive increases in Statutory Liquidity Requirement (SLR) and Cash Reserve Requirement (CRR). There was very little scope for development of Government Securities Market in Pakistan that could provide benchmarks for private sector to play their role in development of Capital Market in the country. To cover non-banking segment, Prize Bonds were introduced in 1960 followed by various NSS schemes. However 1990 onward, market based Government Securities came in to existence. With the introduction of long term paper in 1992 (FIB), long term yield curve emerged that gave opportunity to the Corporate to come up with their instruments that became reality in 1995. Long-term instruments gained momentum after the introduction of Pakistan Investment Bonds (PIBs) in 2000, to stream line the auction of Government Securities and to develop secondary market for the Government paper. SBP introduced selective Primary Dealer System (PD) in 2000. In 2001 KIBOR/KIBID rates were introduced to provide inter-bank call money curve. With the development of Fixed Income Securities Market in Pakistan, SBP allowed Commercial banks to make available Derivative products to their clients. In this regard SBP issued guidelines on Forward Rate Agreements (FRA), Interest Rate Swaps (IRS) and Currency Options in 2005. Foundation of the corporate bond market was laid in 1995 with the first issue of Term Finance Certificates (TFC). Since then, issuance of listed TFCs has totaled approximately PKR 67 billion. The Corporate Bond market in Pakistan has been much more vibrant over the 2001-05 periods, adding approximately PKR 65 billion in issuance or 98% of total issuance to-date.

Pace of development of Islamic Money and Sukuk market is a new phenomenon that gained importance with the induction of 6 full-fledged Islamic Banks and 16 conventional banks to conduct Islamic banking business in Pakistan; however the size of Sukuk Market is very small at the moment. To facilitate Corporates to raise short term funding i.e. up to 9 months, Commercial Papers have recently been allowed but the market has yet to take its roots. According to the detailed World Bank report in 2009, the domestic bond outstanding was 25.16percent of the GDP, equivalent to $32.41 billion. This consists of mainly government bonds, asthe corporate market is yet to develop. Currently, Outstanding T-bills are roughly Rs. 700 billion. Banks hold Rs. 658 billion worth of short term paper and the remaining six percent or Rs. 42billion are held by corporations. Outstanding PIB amount is Rs. 425 billion, out which, Rs. 250billion or 60 percent of holding is with non-banks and corporations. Of the remaining Rs. 175billion, approximately Rs. 40 billion is held in held-to-maturity (HTM). Bonds worth Rs. 95 billion are in 15 years tenor and beyond, they are not traded in the interbank market and are mostly subscribed by insurance companies, pension funds or held by corporations as investment of gratuity or provident funds. The daily interbank average PIB trading volume is roughly Rs 25-30 billion. Daily Treasury Bills outright trading volume is not even Rs one billion. This clearly reflects a serious lack of depth in the market. Corporation that hold 60 percent of the total PIBs do not trade in bonds and hold the paper as investment in long term securities. Therefore, to increase market activity, government institutions need to play an active role in developing secondary market by increasing two-way trading activity, otherwise bond market will never grow.

Bond market in Pakistan

Current status and Overview
Liberalization of the financial system and the switch from credit planning to a market based monetary policy has crated a secondary market for government bonds in Pakistan. Trading in treasury bills and in short-term federal bonds provides the basis for open market operations of the state bank. In 1991, the government with the consultation of World Bank, started issuance of two types of securitiesone of short-term maturity and the other of long-term maturity on the basis of auction through the intermediation of primary dealers, i.e. treasury Bills (short-term) and federal investment bonds (long-term). The salient features of the treasury bills are as under:

T-Bills
The bills are issued at a discount. The investors are required to quote the price at which they are willing to buy t-bills of Rs.100 face value. Individuals, institutions and corporate bodies including banks/DFIs are eligible to purchase the bills. The principal and profit accrued thereon is guaranteed by the government. Principal and profit is payable on maturity. T-bills can be traded freely and are transferable by endorsement and delivery. Tax is deducted at source under the Income Tax Ordinance 1979.

Federal Investment Bonds 4

Bonds are of three different maturity periods viz. three years, five years and ten years. Short-term FIBs have also been issued. Individuals, institutions and corporate bodies including banks, irrespective of their residential status can purchase bonds. There is no quantitative limit on purchases. Bonds are redeemable at par on completion of their respective maturity period. In case cash is require before the maturity date of the bond, the investor may approach his banker et his bonds converted into cash at the market price. In the manner, the government bonds can be traded freely in the secondary market before their maturity date. Each bank is required to display daily sale and purchase prices of bonds at their main branches in major cities. WAPDA, NDFC, BEL, PICIC, and some other firms have also issued non-government corporate bonds and certificates. Trading is very limited. Investment banks which were expected to play a major market-making role have not succeeded in doing so. Term Finance Certificate (TFCs) has been issued by financial and manufacturing companies from time to time. 62 TFCs instruments have been issued on the KSE during 1996-2003 (21 of these were issued in 2002-2003). The secondary market is shallow and largely confined to the public debt sector. The range of financial assets available is limited. The growth of the secondary market has been restricted by the expansion of the national saving schemes (NSS), which are very popular with the public. Rates of return in the secondary market are generally lower than those offered by the national saving schemes although rates on these schemes have been drastically reduced during 2000-2002. The growth of the secondary market is limited by the interventions of the government in the auctioning process to hold down interest rates. Such intervention has been reduced since 1997, when the autonomy of the state bank was recognized through the amendment of the State Bank of Pakistan Act 1962. About Rs.5 billion worth of TFCs were issued during 1995-2000. There was major upsurge in 2002 but the secondary market in TFCs is very undeveloped. Pakistan Investment Bond issues are significantly larger (exceeding Rs.100 billion in 2001-2002 for example). A secondary market has not developed in PIBs and PIBs are not regarded as a capital market instrument. The public is not informed of what the government does with the money raised through Pakistan Investment Bond issues. ((money and banking in Pakistan, fifth edition, SA Meenai, oxford university press,2004))

Development of Bond Market in Pakistan 9 points

The literature on future and prospects of bond market development is vast and growing (Herring and Charusripitak; 2000, Luengnaruemitchai and Ong; 2005, and Leanardo; 2000). Different researchers have found different impediments and proposed solutions to boost the process of bond market development. However, we will discuss here only the prospects and impediments which apply directly to emerging market of Pakistan.

1.Developing Benchmark Yield Curve

Due to little trading of government and corporate bonds long-term yield curve had not established that had limited the trading of private bonds There are two main reasons for nonexistence of yield curve. First, because of government ownership the rate of return is very low as it is not market driven. However market demands higher rate that s why most of the auctions bids are rejected. Further on, Institutional investors and banks are pressurized to invest in these securities even at low interest rate. Even if they invest they are less inclined towards its trade and stay it with them until it held to maturity. Secondly, because of less supply the prices of bonds increases, this increase in

price is just due to the supply and demand not because of market attractiveness of these securities. These all factors limited the secondary market for these securities. A benchmark yield curve is developed by introducing a large number of bonds in the market, increase trading of these securities and through increasing market by making entry easy for both domestic and foreign investors. In 2006 PIBs auction shows a government intention towards the development of long-term yield curve.

2.Crowding out by Government Securities

The government and corporations both are pooling funds for the same resources. But the government securities are risk free and providing returns at lower rate. As compared to it the TFC has higher rate of return and contains some risk in it. The return on TFC issued by corporations has a rate of return equal to the Defence Saving certificates by Government which is risk free and have a maturity time period of ten periods. This game of pooling the funds by government and corporation becomes a major hurdle in development of bond market. The government financing through NSS should also be because it crowds out the private sector and distorts the market rate for long term funds. The decision to allow institutional investors into the NSS should be reversed at the earliest possible time because that wills divert much of funds available for TFCs to NSS at non-market rates. The rates on NSS should also be steadily reduced because they act as a substitute for benchmark long term rates.

3.Market Psyche regarding disclosure requirement

Pakistani investors are more risk averse and due to lack of transparency the corporate debt issued by the corporations are less attractive to traders because of unknown risk inherent in them. So by appropriate disclosure of firm future growth and risk, firms can attract large group of investors at a favorable rate. Availability of data on secondary market transactions plays an important role in making the price discovery process more efficient leading to improved liquidity. Much of the secondary market trading data is already available on the SBP website. This data maintenance process can be further strengthened by providing the data on a historical basis and in a readily usable form. The stock exchanges should make it mandatory for their members to report any debt securities transactions.

4.Higher transaction costs

One of the major reasons of fewer issuances of bonds is the administrative and transactions costs faced by the company at the time of issuance and trade. Higher transaction costs in terms of issuance and listing fee, trustee fee, advisory fee, rating fee, stamp duty and taxes on bonds discourage many investors to invests in the bond market because it further on reduce the rate of returns. And form the issuer s point of view it increases their cost of capital. In order to reduce the cost of issuing TFCs, the government could reconsider the stamp duty on TFCs.

5.Illiquid Secondary Market

Higher transaction cost, thin market, inexperience players, no proper settlement system and little competition all led to a significant decline in the secondary market for bond. Due to high risk and non-availability of benchmark yield curve investors are reluctant to invest in bonds and then further trading. In addition to it, it is difficult to price fixedincome securities having different characteristics, features, covenants, requirements and risk inherent in it. For all this a proper financial analysts are required that are not available in Pakistan. To overcome this problem the government should stop its borrowing from the SBP and place a fresh supply of PIB in the market that will also provide a benchmark for the market. Bonds should be sold after issuing proper calendar for its auction

6.Diversifying Investor Base

Market size of bond is very limited and mostly borrowed by bank and institutional investors that prefer a security to hold it until maturity. That will later on restrict the development of secondary market. The spread of bond ownership

in limited hands and their avoidance of further sale limit the number of investors. Government should increase the market share by issue new long-term bonds securities having different options according to the types of investors at a market prevailed interest rate so that it would attract a large number of investors.

7.Developing the Talent Pool

Along with the diversified pool of issuers and investors, the presence of intermediaries is also crucial in structuring the transactions and providing secondary market support. The government needs to introduce a tax incentive scheme to improve capabilities in the arrangement, distribution and trading of bonds.

8.Development of Infrastructure
A well developed and efficient clearing, settlement, registration and trading center should be established for a good bond market that will centralize all buying and selling of securities. However in 1993, the Central Depository Company of Pakistan Limited was created for the settlement and clearance. In addition to it, two credit rating agencies Pakistan Credit Rating Agency (PACRA) and JCR-VIS.

9.Legal and Regulatory Structure

To attract a large number of domestic and foreign investors Bond market should have a proper legal and regulatory framework having defined rules and regulations relating to the issuance, settlement, registrations, payment and selling of securities. Explicit rules regarding monitoring and accountability for both issuer or dealers and investors ensures public about safety and protection level of their investments. Regulations of SECP regarding bond issuance is much more complicated and carrying time and cost with it as compared to the bank borrowing. So, anew legal and regulatory structure must be developed according to the market preferences and should be equal for all the issuers. Implicit and relaxed regulation will shatter investor confidence and adversely affect economy. In view of market participants, SECP should maintain regulatory framework for the monitoring of all the elements of debt security markets. Rapid settled related the operational independence of credit-rating agencies. In addition to it, SECP should take certain actions regarding the reduction in time of issuance and registration of corporate bonds.

Conclusion
Bond Markets are increasingly becoming a significant source of financing for the private and public sectors in Pakistan. Corporate financing in Pakistan, similar to other emerging markets, is dominated by bank loaning and issuance of equity stocks. There are a number of advantages to development a domestic bond market to harmonize the banking sector. These include increased financial stability, more competitive financial sector, more efficient allocation of credit, and as well organized and diversified portfolio of assets. The domestic bond market in Pakistan faced marvelous growth since its commencement in 1995. Recently, more and more financial institutions are focusing on the term finance certificate market as compared to non-financial firms. Although the local bond market is growing and issuance of local bonds is increasing over the year; however, there are some impediments to bond market development still exist which includes lack of long term bench-mark rates as a result of thin secondary market for sovereign bonds, crowding out of the government securities and some administrative barriers in term of high trading cost. There is a yet lot to do by the regulators to support the local bond market development. This can be promoted by regularly issuing local currency bonds at market rates regardless of financing needs, concentrating issuance on multiple lengths of maturities and reducing borrowing from unfunded sources. The liquidity of the bond market could be enhanced by strengthening data and useful information dissemination regarding corporate bond transactions, providing a REPO facility for corporate bonds, and allowing short selling. Finally, transaction cost in terms of stamp duty and administrative costs should be reduced to make bonds issuance more cost

Hindrances in development of Bond Market

Fiscal and Trade Deficits Law and Order Problem Bad Governance, lack of accountability on the part of bureaucracy, Public and Private Sector institutions. Ineffective Implementation of law and delay in adjudication Lack of market expertise Lack of awareness of new financial products Lack of infrastructure and automation Lack of stringent regulatory policies and their effective enforcement. Lack of self-policing system in the market. Lack of awareness of market ethical values. Political interference in the regulatory functions. Clear laws curtailing clear interpretations Inconsistent supply and small size issues of Government Bonds. Corporate Bond market being not cost effective due to stamp duties levied by the issuance and time taking procedure for their approval. Non issuance of sovereign Sukuk. Transaction cost as stamps duties on Commercial Paper making them non cost effective.

Pakistan's bond market on a rising trend

Published: November 20, 2010 KARACHI - The Government raised a net amount of Rs64.31 billion, as against the target of Rs60 billion, through the auctions of Pakistan Investment Bonds (PIBs during 2009-10 (FY10) mainly due to reopening of the previous

issues throughout the year, according to SBP Annual Report on the working of the Bank (Performance Review) for the year 2009-10 released recently. The report stated that investors seemed most interested in 10-year PIBs, as about 60 per cent of the money was raised through this tenor. As a result of these borrowings, the outstanding balance of the PIBs increased to Rs 505.29 billion at the end of FY10 compared to Rs 440.99 billion at the end of FY09. MARKET TREASURY BILLS A net amount of Rs467 billion (face value) was generated by the Government by means of Market Treasury Bills (MTBs) in 2009-10 compared to net Rs304 billion in the previous year. A total of 25 auctions were held by SBP during the year in which the primary dealers offered an accumulative amount of Rs3.2 trillion against the target amount of Rs1.36 trillion. In an effort to broaden the investor base, SBP allowed non-competitive bids in June 2009 - a process that allows individuals, small investors and non-banks to invest directly in MTBs. A total amount of Rs20 billion (face value) was raised through non-competitive bids during FY10. Mutual funds remained the most active non-bank investors in the MTBs capturing 63 per cent share in total amount raised via noncompetitive bids. SBP is also working in collaboration with National Institutional Facilitation Technologies (Pvt) Ltd, to develop a web portal where retail investors will be able to place noncompetitive bids directly in each auction, Report said. GOVERNMENT IJARA SUKUK The issuance of Government of Pakistan Ijara Sukuk which had been a longstanding need of Islamic banking industry has also served as a new source of funds for the Government. The Report revealed that during FY10 government conducted only one Sukuk auction of 3-year tenor amounting to Rs15.32. A total of four tranches of GoP Ijara Sukuk had been issued since its introduction in 2008 amounting to Rs42.24 billion. E-BOND: ELECTRONIC BOND TRADING PLATFORM As a major step in the development of fixed income markets in Pakistan, an electronic fixed income trading platform provided by Bloomberg called EBND was launched on January 11, 2010. The platform is currently being used for trading of government securities only; however, it has the capacity to support trading of corporate debt instruments as well. EBND which is already in use in 18 countries has the following key features: A central display provides the best live quotes by price makers of all outstanding issues. Dissemination of real time information to investors on transactions in fixed income market. Price takers can approach multiple price makers for firm quotes. Choice for price makers to enter and trade on firm, anonymous orders. Facilitate for users to customize their counterparty credit database. Option to manually input any bilateral deal which is not concluded on Bloomberg through a Voice Trade Capture feature. Although this is a front-end system, straight through processing interface is possible with local settlement systems and banks internal systems as it is based on FIX protocol.

The report predicted that the introduction of this platform is expected to provide not only a boost to fixed income market; it also has a lot for all market participants. The availability of real-time information about yields and turnover will help the issuer in determining demand for its paper and make better funding decisions. Moreover, the platform is likely to attract more investors to the market as the price discovery process becomes much easier resulting into enhanced liquidity and lower liquidity premium. This will also result in further development of liquid yield curves for various market segments. With the availability of a widened investor base, banks would be able to shift Govt debt from their books freeing up funds for private sector credit, it said. The fact that Bloomberg is offering its services in all major financial markets in the world is another advantage of the system as it will provide international investors with an additional window on Pakistans economy, it added.

PAKISTAN GOVERNMENT BOND 10Y TREND

Pakistan's Government Bond Yield for 10 Year Notes rallied 56 basis points during the last 30 days which means it became more expensive for Pakistan to borrow money from investors. During the last 12 months, Pakistan government bond yield declining 1.14 percent. From 2002 until 2011 Pakistan's Government Bond Yield for 10 Year Notes averaged 9.91 percent reaching an historical high of 16.65 percent in December of 2008 and a record low of 4.17 percent in March of 2003. Generally, a government bond is issued by a national government and is denominated in the country`s own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. The yield required by investors to loan funds to governments reflects inflation expectations and the likelihood that the debt will be repaid.

Pak external debt mounts to $58.39b

Published: February 18, 2011 KARACHI - Pakistans total external debt amounted to $58.393 billion at the end of December 2010 while official liquid reserves of the country stood at $14.126 billion in the same quarter (OctoberDecember) of the last year.

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The size of the overall external debt had reached $58.698 billion during the third quarter (JulySeptember) of the year 2010. According to fresh foreign debt and liabilities data posted by SBP on its website on Thursday, as on December 31, 2010, the stock of public debt including the government debt, countrys debt on IMF loans and interest charges, and other foreign exchange liabilities to be repaid by the government slightly slashed to $54.637 billion compared to $54.794 billion in July-September 2010. Within public debt the government debt increased to $44.801 billion from $44.786 billion in the third quarter of the past year. Similarly, the debt on the medium to long term loans to be paid back to Paris Club and other multilateral and bilateral lending institutions also rose to $43.938 billion, compared with $43.906 billion during the period under review. SBP reported. Pakistans debt on IMF loans stood at $8.736 billion of which $1.922 billion and $6.814 billion owned by the federal government and the central bank, respectively. Foreign exchange liabilities stood at $1.100 billion, SBP data said. An economist believe external financing has slowed sharply as debt sustainability concerns have grown, the IMF has withheld USD 3.4 billion of funds since May 2010. Bank borrowing will rise significantly as the government stops printing money. The Q1-2011 auction target for T-bills and bonds is Rs 1,060 billion, versus Rs 711 million of issuance in Q4-2010. Given that bank holdings of government securities already stand at Rs 1.8 trillion, double the SBPs reserve requirement, markets will demand a higher premium to hold any further supply. Public debt increased alarmingly to 66 per cent of GDP by September 2010 compared with 56.7 per cent in September 2009, raising concerns over debt sustainability.

External aid flows likely to materialize

Published: March 22, 2011

KARACHI - Due to resumption in the IMF-supported Stand-By Arrangement Programme, Pakistan is expected to start receiving all of its remaining funds from the US and other multilateral lending agencies in the last quarter (April-June) of the current fiscal year 2010-11.

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Besides disbursement of pending $1.7 billion funds of a total IMF loan to Pakistan in June 2011, around $600 million worth of aid flows could be released under the Kerry-Lugar Bill between March and June 2011. Similarly, a large amount of the US military aid seems to be materialised by the US administration under its loan instrument of Coalition Support Fund (CSF) during the upcoming quarter. This sort of external financing, which is likely to come in the form of the aid and capital flows, will bring a short-term stability to countrys economy, bolstering Pakistans foreign exchange reserves position and shore up the value of Pak rupee against the US dollar ad other major currencies. According to a latest report issued by the Standard Chartered Bank, the austerity measures announced by the federal government recently in a view to curb the budget deficit to 5.5 percent of GDP for the FY11 along with revival of the IMF programme will give a significant boost to the economy and revive the confidence of the investors. Such measures will give the US administration confidence to release the deferred funds. The US administration has pledged $1.5 billion of annual aid under the Kerry-Lugar bill, but only $250 million was released during the first eight months of FY11. Disbursement has been slow due to the suspension of the IMF programme and, more recently, the US protest against the imprisonment in Pakistan of the US official Raymond Davis on murder charges. On 16 March, the matter was resolved as courts acquitted Davis after he reached a settlement with the families of the deceased, the report stated. The World Bank and Asian Development Bank (ADB) have pledged $1 billion each for reconstruction spending in flood-affected areas. During the first seven months of FY11, Pakistan received only $550 million from the World Bank and $400 million from ADB. The slow disbursement has been due to the suspension of the IMF programme; the resumption of the programme is likely to prompt these multilateral agencies to resume lending, the report revealed. The report projected that austerity measures and higher external financing would reduce government borrowing from the markets. Yields should continue to inch down on lower T-bill/bond supply. However, inflation is likely to pick up in the short-term due to rising international commodity prices and new tax measures. The removal of general sales tax (GST) exemptions, the increase in excise duty and the reduction of power subsidies will push inflation higher in Q2CY11. The central bank is likely to keep the policy rate unchanged at 14 percent in 2011 given inflation risks, limiting the downside for the rates market. Unlike in the past, the government is now demonstrating its commitment to stop printing money, the main cause of high inflation. Since January 2011, the government has limited its borrowing from the State Bank of Pakistan (SBP) to Rs 1.29 trillion, implying zero net borrowing. This has helped to contain money supply growth M2 growth decelerated to 14.5 percent YoY as of end-February 2011 from 16 per cent YoY at the end of 2010. Inflation slowed to 12.9 percent YoY in February from 15.5 percent at end2010, it mentioned.

Money markets remain stable in July-Feb FY11

Published: April 14, 2011

KARACHI - The State Bank of Pakistan has drained the excessive amount of liquidity from the banking system through auctions and open market operations in the first eight months of the current fiscal year 2010-11, in an effort to ensure the smooth functioning of the money markets.

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To keep the inter-bank money market liquidity condition in line with the monetary policy stance, SBP moped up Rs540.2 billion during July-February FY11 compared with Rs227.8 billion during the same period last year; whereas injections in the market by the central bank remained low. Moreover, commercial banks deposited Rs673.2 billion with SBP under overnight repo facility (floor for interest rate corridor) compared to Rs226.7 billion during the corresponding period of the last financial year. In its latest quarterly report, the State Bank of Pakistan said liquidity conditions in the money market remained fairly comfortable during Jul-Feb FY11 on account of government borrowings from SBP and growth in bank deposits. The report further revealed that the government accepted Rs180.8 billion (net of maturities) during Jul-Feb FY11 against a net target of Rs89.5 billion. With drying up external financing and the fall in non-bank sources, government was left with little option but to borrow heavily from the banking system. Earlier in the fiscal year, when prospects of external financing were good, government had rejected all bids in auctions of longer tenure Pakistan Investment Bonds (PIBs) due to high rates demanded by banks. Banks on the other hand, were anticipating an increase in interest rates and therefore were more interested in shorter term T-bills, it mentioned. The PIBs auction target of Rs105.0 billion was set for Jul-Feb FY11 against maturities of Rs27.4 billion. The government, however, rejected all bids in the first two auctions (July and August 2010) due to high returns demanded by banks. In subsequent auctions, with an aim to retire SBP borrowings, the government accepted Rs53.0 billion, but this was still lower than target, the report said. Against a target of Rs80.0 billion for the two Sukuks auctions held in the Jul-Feb FY11 period, Rs89.0 billion were accepted. The government received offers of Rs122.5 billion, which reflects strong liquidity position of Islamic banks and their investment appetite for this asset class, the report added.

Bibliography
http://www.tradingeconomics.com/pakistan/government-bond-yield http://www.ciitlahore.edu.pk/Papers/Abstracts/146-8588969311707837058.pdf
http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/20-Nov-2010/Pakistans-bondmarket-on-a-rising-trend

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http://www.lse.com.pk/Markets/DebtMarket.aspx
ISLAMABAD STOCK EXCHANGE BOND AUTOMATED TRADING SYSTEM (ISEBATS) REGULATIONS http://www.ise.com.pk/Regulation/PDF/ISE_Bond_Automated_Trading_System_Regulations.pdf

Erum Zaidi | Publications: November 20, 2010

February 18, 2011 March 22, 2011 April 14, 2011

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