Government decides to allow MoF to issue only floating-rate Zero Coupon Bonds

ISLAMABAD: The government has reportedly decided to allow Ministry of Finance (MoF) to issue only floating-rate Zero Coupon Bonds under Pakistan Investment Bonds (PIBs) rules instead of giving it blanket authority. Well-informed sources told Business Recorder that the profit on bonds shall be paid monthly, quarterly and semi-annually as was proposed by the Finance Ministry.

Sharing the details, sources said Finance Division in line with the Public Debt Act, 1944, Government of Pakistan (GoP) issues two broad types of marketable government securities in order to raise loans i.e. Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs). T-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 issuance.

Finance Division had currently issued fixed-rate PIBs with 3-year, 5-year, 10-year and 20-year maturities; and floating rate PIBs with 10-year maturity under the Pakistan Investment Bonds Rules, 2000. All of these PIBs pay profit on semi-annual basis. Further, PIBs pay the entire face value on maturity and also pay profits at regular intervals until maturity. PIBs can be further categorized as fixed-rate PIBs and floating rate PIBs; (i) fixed-rate PIBs pay a fixed rate amount of profit on each profit payment date and; (ii) floating-rate PIBs pay a variable amount of profit on each payment date. The profit rate is determined by adding a spread to an underlying reference rate such as 6-month T-bills yield.

The sources further stated that to further develop the government securities market, attract more diversified investor base and to provide more flexible options, Finance Division intends to introduce floating-rate PIBs having maturity of 3 and 5-years with quarterly profit / coupon payments. Under Rule-6 & 9(I) of the Pakistan Investment Bonds Rules, 2000, Floating-Rate PIBs of 3 and 5-year maturities can be issued with semi -annual profit payments but not with quarterly profit payments. The proposed floating PIBs of 3 and 5-year maturities with quarterly profit payment to the portfolio of government securities for the proposed Floating-Rate PIBs of 3 years are expected to be useful additions for the following reasons; (i) these PIBs will be attractive for investors with medium-term investment horizons who want to avoid interest rate risk. These include banks, mutual funds, certain segments of insurance businesses, employee retirement funds and individuals. Currently, such investors do not find government securities which match their time horizons and risk appetites. Financial intermediaries such as banks, insurance companies and mutual funds will be able to design more products around these PIBs to fulfill the needs of many of their depositors and investors, particularly those individuals and institutions with high and regular liquidity needs; (iii) during periods of rising interest rates, investors tend to concentrate their exposures to very short-maturity instruments, such as 3-month T-bills, which poses high rollover and liquidity risks for the government. These PIBs, whose profit payments will vary in line with the 3-month T-bill yields, will act as a substitute to 3-month T- bills. Many of the investors may prefer to invest in these PIBs which despite their longer maturities, carry low interest risk like the 3 month T-bills. This will lower the rollover and liquidity issues of the government.

These PIBs will be the preferred borrowing instrument for the government 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 decline when short-term interest rates decrease.

On August 12, 2020, Finance Division submitted to the CCLC that for this purpose, amendments in Rules 6 and 9 (1) of the Pakistan Investment Bonds Rules, 2000 is required enabling Finance Division to introduce floating-rate PIBs having maturity of 3 and 7 years with quarterly profit/coupon payments. Section 28 of the Public Debt Act 1944 (XVIII) of the 1944) empowers the federal government to make, amend, vary or rescind rules. Therefore, approval of the federal cabinet, being the Federal Government is required.

The committee was also apprised that a summary for CCLC was moved by the Finance Division on April 8, 2020 for soliciting approval of the federal government regarding proposed amendments in Rules 6 and 9 (1) of the Pakistan Investment Bonds Rules 2000. The CCLC, however, directed that the summary may be submitted for consideration of CCLOC after redrafting the proposed amendments. As per the direction of CCLC, the draft notification has been redrafted in consultation with Law and Justice Division.

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

During discussion, the members of the Committee were of the view that the proposed amendment will disseminate a impression that Finance Ministry, through the proposed amendment, is trying to take all powers regarding matters relating to marketable government securities in order to raise loans i.e. Treasury Bills (T-bills) , Pakistan Investment Bonds (PIBs). The members, therefore, proposed slight amendment in rule 6 of the Pakistan Investment Bonds and suggested that a proviso may be added in order to grant the Finance Ministry the authority to issue "Zero Coupon Bonds" rather than granting an overarching authority to the Finance Ministry.

After detailed discussion, the CCLC cleared the summary that profit on the bonds shall be paid monthly, quarterly and semi-annually, as decided by the Finance Division provided that Finance Division may also issue zero coupon bonds.

Copyright Business Recorder, 2020