The government decides to authorize the MoF to issue only floating rate zero coupon bonds – Markets


ISLAMABAD: The government reportedly decided to allow the Ministry of Finance (MoF) to issue only floating rate zero coupon bonds under Pakistani Investment Bond (GDP) rules instead of giving it general authority. Informed sources told Business Recorder that profits on the bonds will be paid monthly, quarterly and semi-annually, as proposed by the finance ministry.

Sharing the details, sources said that the Finance Division, in accordance with the 1944 Public Debt Act, the Government of Pakistan (GoP) issues two main types of marketable government securities in order to obtain loans, namely Treasury bills (T-bills) and Pakistan investment bonds (BIP). Treasury bills are considered short-term securities and have maturities of 12 months or less at the time of issuance, while PIBs are longer-term securities and have maturities of more than 12 months at the time. of the show.

The Finance Department had currently issued fixed rate BIPs with maturities of 3 years, 5 years, 10 years and 20 years; and floating rate GDPs with a 10-year maturity under Pakistani Investment Bond Rules, 2000. All of these GDPs pay profits on a semi-annual basis. In addition, the PIB pay the full face value at maturity and also pay profits at regular intervals until maturity. GDPs can be classified as fixed rate GDP and variable rate GDP; (i) fixed rate GDPs pay a fixed rate profit amount on each profit payment date and; (ii) Variable rate PIB pay a variable amount of profit on each payment date. The rate of profit is determined by adding a spread to an underlying benchmark rate such as the yield on 6-month Treasury bills.

The sources further said that to further develop the government securities market, attract a more diverse investor base and provide more flexible options, the Finance Division intends to introduce floating rate GDPs to ” a duration of 3 and 5 years with quarterly payments of benefits / coupons. Under Rules 6 and 9 (I) of the Pakistan Investment Bonds Rules, 2000, 3 and 5 year floating rate GDPs can be issued with semi-annual profit payments but not with quarterly profit payments. The proposed 3-year and 5-year floating-rate GDPs with quarterly profit payments to the government securities portfolio for the proposed 3-year floating-rate GDPs should be useful additions for the following reasons; (i) these BIPs will be attractive to investors with medium-term investment horizons who wish to avoid interest rate risk. These include banks, mutual funds, certain segments of the insurance business, employee and personal pension funds. Currently, these investors cannot find government securities that match their time horizons and risk appetite. Financial intermediaries such as banks, insurance companies and mutual funds will be able to design more products around these GDPs to meet the needs of many of their depositors and investors, especially individuals and institutions with financial institutions. high and regular liquidity needs; (iii) during periods of rising interest rates, investors tend to concentrate their exposures on very short-dated instruments, such as 3-month Treasury bills, which presents refinancing and liquidity risks high for the government. These BIPs, whose profit payments will vary according to the yields of 3-month Treasury bills, will replace 3-month Treasury bills. Many investors may prefer to invest in these PIBs which, despite their longer maturities, carry low interest risk such as 3-month treasury bills. This will reduce the government’s turnover and liquidity problems.

These BIPs will be the government’s preferred borrowing instrument in an environment of temporarily high interest rates. Despite high interest rates, the government will be able to borrow for longer periods knowing that its borrowing costs will automatically decrease when short-term interest rates fall.

On August 12, 2020, the Finance Division submitted to the CCBC that for this purpose, amendments to Rules 6 and 9 (1) of the Pakistan Investment Bonds Rules, 2000 are required to enable the Finance Division to ” introduce variable rate GDPs with a maturity of 3 and 7 years with quarterly profit / coupon payments. Section 28 of the Public Debt Act 1944 (XVIII) of 1944) empowers the federal government to make, modify, modify or repeal rules. Therefore, federal cabinet approval, being the federal government, is required.

The committee was also informed that a summary for CCLC was proposed by the Finance Division on April 8, 2020 to seek federal government approval for the proposed changes to Rules 6 and 9 (1) of the Pakistan Investment Bonds Rules. 2000. CCLC, however, directed that the summary may be submitted to CCLOC for review after rewording the proposed changes. In accordance with CCBC guidelines, the draft notification has been revised in consultation with the Law and Justice Division.

It was therefore proposed that the amendments to the relevant sections of the Pakistan Investment Bonds Rules, 2000 could be approved by CCLC.

During the discussion, the Committee members were of the opinion that the proposed amendment will convey the impression that the Department of Finance, through the proposed amendment, is trying to take all the powers regarding securities matters. negotiable public funds in order to contract loans, i.e. treasury bills. (T-bills), Pakistan Investment Bonds (GDP). Members therefore proposed a slight amendment to Rule 6 of the Pakistani investment bonds and suggested that a conditional clause could be added to grant the Ministry of Finance the power to issue “zero coupon bonds” instead. than granting global authority to the Ministry of Finance. .

After extensive discussion, CCLC approved the summary that bond profits will be paid monthly, quarterly and semi-annually, as decided by the Finance Division, provided that the Finance Division can also issue zero coupon bonds.

Copyright Business Recorder, 2020


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