There are concentrated efforts to improve the maturity profile of Pakistan debt (mainly domestic). The rollover risk in Pakistan has remained high in the past decade or so. The IMF always pushed for improving maturity profile of government debt. That was happening in times of last IMF programme (2014-16) and the process was reversed right after the exit of the IMF. It is back in action.
The difference between now and then is fundamental in nature. In 2014, Dar issued over Rs2 trillion of fixed rate PIBs at peaking rate of long-term bonds and the government accrued higher cost in days of low rates. This time, the debt office was a little cautious in accepting bonds at peaking rates in 2019. However, acceptance was high in Jul-Aug 19 (Rs1 trillion) when the bond yields ware at 13-14 percent. The quantum of acceptance at peaking rate was relatively less. And the bond yields started tapering off since, despite the short rates at peak (read: “Bond Yields – from greed to fear”).
Ministry of Finance is now coming up with a complete suite of product to cater all kind of demand in the market. That is a right step towards developing a debt capital market. The debt capital market needs a benchmark yield curve. That can be constructed when there is a sizable market at every pocket. The plan is to enhance the penetration of floating bonds from 3-10 years. And now, there is some sense of building 15-20 year bond market too.
For doing so, market distortions are to be eliminated. One big issue is huge NSS market (outstanding stock at Rs3.6 trillion). It is a non-competitive market where issuer has no control whatsoever. Still, some institutions can invest in it without any bar or limit. The NSS rates follow the market rates with a lag. This creates arbitrage opportunities for some. Plus, one can take out the money from NSS without any meaningful penalty. People do that and the cost is incurred by the exchequer. This has to come to an end.
The average maturity profile of the government is around 4 years and the plan is to increase it to 7 years. This will help reduce the rollover risk. The other important element is to grow the number of buyers of government bond. At this point, it is not easy for non-competitive bidders to participate. Banks usually discourage such moves as this cannibalizes their deposits selling. Ministry of Finance and SBP should work on making the process easy.
With frequent maturities coming up, government has to do numerous auctions. The cash management becomes problematic due to that. It is one reason for moving towards PIBs (both fixed and floaters) from T-bills. The focus is to bring the stock of T-Bills down. The SBP holding of T-Bills (over Rs7 tn) is already converted into T-Bills. That was an easy task and was done by a stroke of pen. Changing market T-Bills will take time and skills. The market T-Bills stock was Rs5.7 trillion in April.
With interest rates bottoming out, it is time to capture as many PIBs as the government can. Banks might not be interested in fixed bonds at low rates; but government should get some participation in it. The rest can be done on floating issues. The government is planning to come up with quarterly coupon floating bonds to encourage more investment.
The plan is to synchronize the auctions of PIB floaters with T-Bills to make it easy for investors to switch. This will enable maturing amount of T-Bills to go in PIBs. The government has recently increased the auction size of fixed PIBs. These are good steps; but vibrant debt management demands active cash management. The government has to do something with the cash lying with banks at Rs3.8 trillion (Rs1.9 tn in Jun-18). The conversion to Treasury Single Account (TSA) cannot be overemphasized.
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