The timing of the issuance of Pakistan Banao Certificates was not appropriate given Fitch's downgrading of Pakistan's long-term currency issuer default rating to 'B-' from 'B' on December 15, 2018 followed more recently by Standard and Poor's downgrading to 'B-Negative' from 'B" on February 5, 2019. This was stated by Dr Hafiz Pasha, former Finance Minister to Business Recorder.
Three notifications were issued in January with respect to the Pakistan Banao certificates: (i) on 2 January 2019 the rate of profit was fixed at 5 percent for three year certificates and 5.5 percent for 5 year certificates; (ii) on 29 January the profit was equivalent to 6 month LIBOR plus 400 basis points per annum; and (iii) on 30 January the notification gave a fixed rate again of 6.250 percent for three year tenor and 6.750 percent for five year tenor.
Economists on condition of anonymity added that downgrading by two of the three major global rating agencies accounted for higher risk requiring a higher premium to hedge against the risk of Pakistan not being able to honour this obligation down the road.
The profit allowed on 30 January may not be attractive for prospective investors, economists noted, citing Turkey as an example - a country experiencing balance of payment problems though not as acute as Pakistan - offering up to 8 percent on dollar bonds. Pakistan may have to offer a rate of return in double digits for the certificates to make them an attractive investment, economists maintained.
Issuing three notifications in one month reflects lack of preparedness on the part of the Finance Division that required fine tuning and created confusion in the market, Dr Salman Shah, former Finance Minister, said while talking to this correspondent.
Fine tuning is also evident in the penalties for earlier encashment of the certificates: (i) on 2 January the notification gave a penalty of one percent for encashment before the lapse of one year; (ii) on 29 January the penalty was 1.25 percent of the principal amount before the lapse of one year for three years certificates where the six monthly profit has accrued; on encashment after completion of one year but before the lapse of two years, a deduction of 1.500% of the principal amount, with an additional deduction of 0.750% of the principal amount where the six-monthly profit has been paid or has accrued in the second year; and on encashment after completion of two years but before the lapse of three years, a deduction of 0.750% of the principal amount for each of the two completed years, with an additional deduction of 0.375% of the principal amount where the six monthly profit has been paid or has accrued in the third year.
However, no profit shall be paid for any incomplete six-monthly period, as specified in the proviso to sub-rule (2) of rule 8 of the Pakistan Banao Certificates Rules, 2018.
(iii) the 30 January notification stipulates that in case of premature encashment in US dollars of the Pakistan Banao Certificates of five-year tenor; (a) on encashment before the lapse of one year, a deduction of 1.375% of the principal amount shall be made where the six-monthly profit has been paid or has accrued; (b) and after completion of one year but before the lapse of two years, a deduction of 2.000% of the principal amount shall be made, with an additional deduction of 1.000% of the principal amount where the six-monthly profit has been paid or has accrued in the second year; (c) after completion of two years but before the lapse of three years, a deduction of 1.250% of the principal amount shall be made for each of the two completed years, with an additional deduction of 0.625% of the principal amount where the six monthly profit has been paid or has accrued ill the third year; (d) after completion of three years but before the lapse of four years, a deduction of O.500% of the principal amount shall be made for each of the three completed years, with an additional deduction of 0.250% of the principal amount where the six-monthly profit has been paid or has accrued in the fourth year; and;(e) after completion of four years but before the lapse of five years, a deduction of 0.250% of the principal amount shall be made for each of the four completed years, with an additional deduction of 0.125% of the principal amount where the six- monthly profit has been paid or has accrued in the fifth year; and
No profit shall be paid for any incomplete six-monthly period, as specified in the proviso to sub-rule (2) of rule 8 of the Pakistan Banao Certificates Rules. 2018.
On 7 January, 2019, State Bank of Pakistan (SBP) clarified to an accounting firm that the following are eligible to invest in Pakistan Banao Certificates, reference rule 6: (a) Pakistani individuals with computerized National Identity cards (CNIC); (b) Pakistanis individuals with National Identity Cards for Overseas Pakistanis (NICOP); and (c) Holders of Pakistan Origin Cards.
Rule 7 of PBC rules 2018 requires that PBC can be purchased against remittances, through official banking channels, from investors own accounts maintained aboard. Thus as per the PBC rules 2018, any of the above referred identity documents and bank accounts outside Pakistan are eligible to invest in PBCs. However, remittances for investment in the PBC must originate from the investors own accounts maintained abroad, the SBP stipulates.
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