Pakistan Bond Market

FINANCIAL INSTITUTIONS




Submitted to: Sir Sharique Ayubi
Submitted by: Sandesh Kumar
ID: 10716
Section : A
Assignment topic: Pakistan Bond Market
Date: 09/02/11


PAKISTAN BOND MARKET
Of late, the Pakistan economy has been growing at a steady rate. Starting
at a low level of development, the equity market in Pakistan has registered
phenomenal growth in terms of the size of the market and institutional
development but the fixed income securities market has not developed as
quickly. At around 15 percent of GDP, Pakistan's savings rate is one of the
lowest among developing Asian economies.
The bond market in Pakistan covers debt and debt like securities issued by
the government, statutory corporations and corporate entities. As of June
30, 1995, the size of the Pakistani bond market was approximately Rs.
811.3 billion, the equivalent to US$ 26.2 billion or about 43% of the
country's GDP. While this may seem a fairly large amount, its size largely
reflects the cumulative effects of financing Pakistan's continuing budget
deficits, as government securities are auctioned, they have not yet
emerged as effective benchmarks.
The market for the bonds of statutory corporations and corporate entities is
at an early stage of development, but its prospects appear promising.
These institutions have a genuine need to issue more debt instruments,
given their desire to secure term financing, the limited availability of
alternative funds, and their large capital expenditure needs. Moreover,
there is a ready market for these bonds, given their relatively attractive
yields and a large and growing pool of investible funds. There is clearly
potential for growth.
There are various views on why the development has been so slow and
unable to keep pace with the development of the stock market. There
appears to be a consensus that potential bond market institutions in the
country have suffered from a lack of expertise, capital and trained staff.
Perhaps it is understandable that institution building does not take place
overnight, and that it requires a careful strategy and long term commitment
on the part of the government as well as the market participants.
There is widespread agreement among the government and private sector
participants that Pakistan needs a viable bond market in order to mobilise
private savings efficiently for long term investments. Moreover, the
government and the financial community have recently taken important
steps to foster capital market development. While this support is important,
even crucial, there are a number of areas requiring greater attention in
order for a robust bond market to develop.
Jahangir Siddiqui recently pointed out several anomalies which have been
hampering the growth of the bond market in Pakistan. He said that the
Short term Federal Bond which was introduced in 1996 has a structure
which creates several problems in secondary market trading for outright
purchases as it is not possible to quote a specific bid for a particular
auction since each instrument carries a different profit payment and as a
consequence the vibrant secondary market for T-bills where the average
daily volume was between Rs. 200 to 500 million has ceased since their
introduction.
He also said that on the corporate bond front, one of the biggest problems
regarding their marketability is that Term Finance Certificates (TFCs) are
not included as approved investments in the Statutory Liquidity
Requirement (SLR) of commercial banks and SLR of NBFIs. This is
surprising because NIT units which are similar to these certificates but have
not been rated by an approved credit rating agency are approved
investments for maintenance of SLR.
Nasir Bukhari has also on occasion outlined several issues which are of
paramount importance if the Pakistan bond market is to be developed. He
has stressed on increased awareness, especially in the retail sector and
the introduction of issues of blue chip companies which already enjoy a
wider recognition and investor confidence. He also said that at present
TFCs are in direct competition with National Saving Schemes (NSS) and
Short Term Federal Bonds (STFB) and said that distortions related to tax
and Zakat should be removed to provide a level playing field.