According to credible reports, the State Bank is looking at ways to make the trading of government bonds more popular in the capital market. In order to do that, it is planning to introduce legal changes in the relevant laws and also consulting the Finance Ministry, Securities and Exchange Commission of Pakistan (SECP), stock markets and other relevant institutions. Monetary authorities of the country are also expected to study the experience of similar initiatives in other countries because government securities are generally considered illiquid.
However, as the changes in law and the system would take some time to be introduced, the measure is not expected to be put in place shortly.
The proposal, in our view, has certain favourable implications in the areas of monetary policy and investment flows and options. If properly executed, the measure could go a long way in reducing government's dependence on the banking system for budgetary borrowings by increasing the flow of private savings to finance government budget.
It is no secret that national saving schemes of the government were, until recently, one of the major source of financing budget deficits but a drastic decrease in the rate of return on these schemes have rendered them unattractive thus forcing the government to rely increasingly on the financial institutions for its fiscal requirements.
As the dependence of the government to finance its deficit from non-bank sources is comparatively less inflationary, such a move could be considered beneficial at a time when the price pressures in the economy are quite apparent. From the monetary policy point of view, the measure, therefore, would be anti-inflationary and at the same time would not hurt the credit creating potential of the banks, which is generally the case when contractionary stance is followed.
At present, government bonds are traded between a limited group of investors, mainly banks and other financial entities and that too for limited time and purposes to meet statutory requirements. As such, they are almost irrelevant for ordinary investors and so far as the working and depth of the stock exchanges is concerned.
In fact, most of the trading in the capital market is presently concentrated in a few scrips, which enjoy heavy weightage in the index and influence the overall sentiment in the market. This is despite the fact that futures trading has also been introduced and gaining popularity.
The proposed amendment in the relevant laws would hopefully make the gilt-edged securities more attractive for general investors, add to the depth of the market and reduce banks' leverage to put pressure on the interest rates. In particular, the move would expand investment avenues for the households and, to a certain degree, check the present trend of making speculative investment in real estate and in selected scrips.
Ordinary investors like senior citizens and widows could find this investment particularly attractive because of guaranteed rate of returns and greater marketability. It is better to open more and more domestic investment avenues because there are already reports of funds flowing abroad for real estate investment due to very high prices in the country and lack of other alternatives within Pakistan.
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