The Development of Debt Market in Pakistan

The article summarizes views of Mr. Khurram Baig, in his article, "The Development of Debt Market in Pakistan", which discuses the bond market of Pakistan and covers the issues and problems that it has been facing since years which are some of the leading factors hampering the overall debt market. The equity market, in contrast, has progressed all over the Asian region; but the debt markets in Asia, and in Pakistan, have not been able to develop.

Even though the size of the debt market in Pakistan is 43% of its GDP, much of the issues have been done by the government securities, which have not been able to set a good benchmark for other private corporations for launch a similar type of issues. Although the need for corporations and entities for a secure term financing is essential, the article mentions reasons such as lack of capital, expertise and trained staff, which is hampering these corporations to do so.

The demand for a debt market has emerged effectively now, considering the need to gather together the savings from retail, large individual and institutional investors for long term financing. However, there are some problems identified by prominent leaders, which are causing a slow growth.

One of the problems is that the short term bonds introduced by the government are causing problems in setting benchmark for the secondary market trading. It is not possible to place a consistent bid as a result of different profit payments. Another problem identified is the TFCs not being considered as an investment for banks while displaying list of investments for SLR to the State Bank.

In an attempt to liberalize and deregularize, the need to spread awareness to the retail investor regarding many saving schemes such as the NSS is important. Also, different schemes should yield different benefits in the form of returns to avoid clashes. The attempt to introduce foreign currency accounts for non-residents, and exemptions to it from zakat, and other taxes is a positive approach inn favor of the debt market.

However, there are some limitations specified in the article: the first being the small size of the market. For international investments, small markets are not a lucrative opportunity to invest. The fact that only a few private corporations are credible to issue bonds and the secondary market not being liquid enough makes it really a harsh environment for investment. Lack of regularity and a set framework for both issuers and investors in debt market is also a reason for its slow progress in Pakistan. With lack of proper accountability of companies within, it is difficult for the investor to trust issuers where the level of risk rises.

Another reason is also the lack of a credit rating system in place, and the mixture of Islamic and conventional mode of financing, which yields different returns and thus, causes problems for investors, with a varying/unclear benchmark for returns.

Apart from the problems specified, the country risk is also one of the major factors for lack of investment in the bond markets. With credit ratings below benchmark, Pakistan’s debt market is always skeptical because of low For-ex reserves. There is an option of hedge funds to invest in the discounted price bonds, but then the quick possibility of withdrawal of funds from the market make the situation tenser for Pakistan, considering low reserves. Also, the cost of capital has risen tremendously considering the servicing high interest rates.

With the removal of TAP systems, introduction of new debt instruments such as FIBs and STFBs, along with the initiation of secondary market for each, and also, the auctions for OMOs regularly in an attempt to further widen the secondary market, the opportunities for foreign investors have increased.

The risks to foreign investors include the currency risk, where a change in the exchange rate affects investments badly. Hence a profit earned by investing in a period of time has no real effect as it takes more rupees to buy a dollar in terms of devaluation. Apart from that there is inflationary pressure that makes the prices go up every often leading to interest rate risk. This eventually leads to a rise in the cost of doing business.

The role of State Bank to keep a check on the SLR position of banks is important since banks are the tool to implement the nation’s monetary objectives. The role of brokers in providing assistance to execution of capital market activities cannot be ignored in the overall scenario of monetary management.

With control of various problems identified such as the country risk, economic risk, which includes currency risk, inflation, weak secondary markets, lack of proper rules and framework mechanism, and the cost of doing business, Pakistan has the potential to strive back on its own. But the issues need to be addressed on an urgency basis to ensure prompt results.