The government is all set to issue 3 and 5-year floating-rate Pakistan Investment Bonds (PIBs) with quarterly profit payments meant to attract investors who want to avoid interest rate risk, sources close to Secretary Finance told Business Recorder.
For this purpose, Finance Division has proposed amendments in Rules 6 and 9(1) of Pakistan Investment Bonds Rules, 2000.
According to the Finance Division, in line with the Public Debt Act 1944, Government of Pakistan (GoP) two broad types of marketable government securities are issued in order to raise loans - Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs). Income Tax (IT) 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.'
The sources said Finance Division currently issues fixed rate PIBs with 3-year, 5-year, 10-year and 20-year maturities and floating -rate PIBs with 10-year tenor 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 amount of profit on each profit payment date and;(ii) floating-rate PIBs pay a variable amount of profit on each profit payment date. The profit rate is determined by adding a spread to an underlying reference rate such as 6-month T-bills yield.
Finance Ministry maintains that to further develop the government securities market attract more diversified investor base and to provide more flexible options to the investors, it intends to introduce floating-rate PIBs having maturity of 3 and 5-year with quarterly profit/ coupon payments.
Under Rule-6 &9(1) of 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-rate PIBs of 3 and 5-year maturities with quarterly profit payments are expected to be useful additions to the portfolio of government securities 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, employees retirement funds and individuals. Currently, such investors do not find government securities which match their time horizons and risk appetite; (ii) financial intermediaries such as banks, insurance companies and mutual funds will be able to design more products around these PIBs to fulfil the need 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 on 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 sustainable 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 risks for the government; and (iv) these PIBs will be the preferred borrowing instruments for the government in an environment of temporary high interest rates. Despite high interest rates, the government will be able to borrow for a longer period knowing that its borrowing costs will automatically decline when short-term interest rates decrease.
The sources maintained that for this purpose, amendments in Rules 6 and 9(1) of the Pakistan Investment Bonds Rules, 2000 are required enabling Finance Division to introduce floating-rate PIBs having maturity of 3 and 5-year with quarterly profit/ coupon payments. Section 28 of the Public Debt Act 1944(XVIII of 1944), empowers the federal government to make, amend, vary or rescind rules. Therefore, approval of the federal cabinet, being the federal government is necessary.
The draft notification containing proposed amendments in Rules 6 and 9(1) of Pakistan Investment Bonds Rules, 2000 has been vetted by the Law and Justice Division for approval of federal government.
The sources said, when the proposal placed before the Cabinet Committee on Disposal of Legislative Cases (CCLC), a week ago, wherein Finance Division faced an embarrassing situation when the committee rejected the wording of proposal, saying that words and phrases used, such as profit, coupon, coupon rate, etc.) in the proposed amendments have same meanings and instead of using different words, a single common word/phrase may be used in the proposed amendments.