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Development of Bond Market in PAKISTAN
Development of Bond Market in PAKISTAN
Background
Bond markets play an important role in mobilization of capital. The investments are very necessary for economic development of a country. A good market will help promote economic growth and reduce the risk of financial crises. To improve the efficiency of the bond market what can be done is that financial market regulation and supervision should be strengthened, market infrastructure should be enhanced, new investments areas(products) for better mobilization of savings and improvement of investor bases. ((Developing Bond Markets in APEC - Toward Greater Public-Private Sector Regional Partnership))) The bond market is composed of Pakistan investment bonds, corporate bonds, Sukuks and commercial paper. Overall this market is 5% of GDP at the moment which is very small as compared to other economies. (((bond market development in Pakistan by Muhammad Arif 2007)))
Bond market helps in the implementation of monetary policy, including achievement of monetary targets or may be inflation objectives The development of bond market can force the financial intermediaries to develop other products like Repo, Structured finance and Derivatives. Cost of debt servicing can be reduced through funding of Government Budget deficits on market-oriented funds. (((bond market development in Pakistan by Muhammad Arif 2007))) Further I can say development of local bond market provides: Diversification of financial sector into equity, debt and bank financing Effective allocation of capital competition in financial sector Supports infrastructure development, privatization, securitization, and the rise of new institutional investors requiring long term assets to match long term liabilities Reduces the currency, interest rate and funding exposures risks Allows more efficient allocation of savings by reducing banks role that also reduces the element of political interference Allows borrowers to use capital that is tailored to their assets and operations Provides retail and institutional investors with several high quality and liquid domestic saving vehicles. (((PeerPapers.com)))
Problem Statement
Money market and Monetary operations Issuance strategy, market access and debt management framework Developing benchmark issues Investor base Primary market Secondary market Settlement infrastructure Legal and regulatory framework Taxation policy
Linkages of sub national/Private sector bonds with government bond market Sequencing of development Plan for the development of bond market
There cannot be any doubt that financial system of Pakistan has a lot of potential, however, it is to be searched and put in place. Another angle, which needs to be brought into the system, is to integrate it with global financial system. The vision, which anybody can have in the market for the future financial system of Pakistan, can be briefed as : It has to be market based The market should have its own policing system in addition to Regulatory framework. Development of new hedging products like derivatives. Updating of accounting/auditing and reporting system in line with the international standards. Fully automated financial system. New Government Securities Act to replace out dated Public Debt Act 1944. Listing of Government Securities on Stock Exchange to widen investor base. Implementation of Real Time Gross System to mitigate systematic risk in fund settlement. Bond stripping to create liquidity in the bond market and to induct zero coupon yield curve. To foster growth of corporate Bond market in Pakistan by making it cost effective. To develop trading/Risk Management/Price dissemination mechanism for Corporate Bond Market. Financial Institutions to have controls i.e. Clear Strategies of duties at all levels, Dual Controls, Rotations of assignment of duties, Internal auditing of all operations, Audit programs for external auditing, Operational reviews Development of newly inducted Islamic finance Development of investor base specifically Mutual Funds Development of Sub National Bond Market in Pakistan Development of Infrastructure/Mortgage Finance
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.
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))
Transaction cost as stamps duties on Commercial Paper making them non cost effective.
Opportunities
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transmission channel of monetary policy. This would facilitate investors/issuers to have better view of interest rate movements. This includes introduction of SBP own instruments, review of monetary policy execution framework to switch over to explicit interest rate targeting, establishment of Market Stabilization Fund (an arrangement in which government share the cost of monetary policy operations with central bank), capacity building of DPCO, Projections of Government Cash flows. o Building up institutional and market microstructure for developing Government securities market in Pakistan i.e. developing distribution channel through market makers and dealers having expertise in securities business.
o Keeping consistent supply of large size long-term government
instruments for creating liquidity and proper yield curve. To achieve this goal, reopening, stripping and fundability need to be allowed o Timely market information to he issuers as well to investor through data dissemination.
o Diversifying the investor base. The steps include development of Asset Management Firms/Mutual Funds/Discount Houses to diversify investor base through legislative support. o Containing crowding-out effect through reducing deficit financing for developing Corporate Bond Market. o Creating appetite for bond market by supporting Islamic Fund Industry, Mortgage and Infrastructure Finance initiatives. o Building Bench mark curves i.e. Revaluation, Clean, IRS, zero coupon curves. o Aligning Sub National/local Governments/Public Sector requirements with Government Bond Market by providing them same infrastructure. o Reducing fees/Stamp duties on Corporate Bonds/Commercial papers to make them cost effective. o Allowing Supranational Bonds in Pakistan to create liquidity in Corporate Bonds Market and to have best international practices through their presence. o Attracting non-resident investors by providing them better opportunities to have positive yields by extending some concessions like tax exemptions. o New legislation aligned with current environment for Government as well Corporate Securities Market. o Creating tax base on equity providing level playing field to all investors.
o Allowing international depositories linked with domestic depositors
o Establishing cross border settlement mechanism. This would reduce cost of doing business in own and with others markets. o Developing Derivatives market for facilitating investors/issuers to hedge the risks on their portfolios. o Developing Bond Market in sequenced manner i.e. from simple to complex instruments/infrastructure. o For developing above Government as well regulators (central bank and securities commission) to work together in devising policies and than coordination in their implementation process.
(((bond market development in Pakistan, Muhammad Arif sept 2007)))