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The government has already borrowed billions from the International Monetary Fund (IMF) over the last two and a half years and is continuously borrowing from the State Bank and commercial banks to meet its expenditures. Funds from other donors including the World Bank and the Asian Development Bank are also coming for development work. All these are adding to the debt and liabilities of the country which have crossed the limit of 60 per cent of gross domestic product set under the Fiscal Responsibility and Debt Limitation Act.
However, to service the debt and meet the expenditures, the government is mulling over different options, including issuance of exchangeable bonds of Oil and Gas Development Company in the international market, floating shares of state-run companies in domestic bourses and offering national savings certificates to overseas Pakistanis. The expatriate Pakistanis are presently not allowed to buy savings certificates directly but they reportedly do so with the help of their relatives at home.
Implications in long run
“Borrowing through savings certificates seems to be a good option for the government whose heavy borrowing from domestic banks is leaving little for the private sector to borrow for investment in their businesses,” said Hamad Aslam, Group Head of Equity Research BMA Capital. These certificates will lead to increase in remittances and ease the pressure off balance of payments, he said.
However, the government will have to consider implications of such a borrowing in the long run when its debt burden will grow sharply. In addition to this, some money received through savings certificates may go towards lavish spending by the government like purchase of luxury cars and expensive foreign trips.
According to State Bank data, investment in National Savings Schemes, including prize bonds, stood at Rs1.6 trillion at the end of January 2011.
Aslam was of the view that instead of floating debt instruments the government can consider selling part of lucrative assets through share offers which will be quite attractive for investors who will receive dividends and bonus on such investments. Shares of profitable state-run companies will be a source of encouragement for investors compared to loss-making companies.
Risks and benefits
InvestCap Head of Research Khurram Schehzad said borrowing avenues should be diversified and long-term to serve the debt which will stay in place. Comparing treasury bills with savings certificates, he said T-bills are short-term instruments ranging from three months to one year, which creates problems for the government in repayments. On the other side, savings certificates have maturities up to 10 years.
Schehzad said expatriate Pakistanis have money to invest and the savings certificates will provide them a safe and secure avenue backed by government guarantees. Financial problems in the west, particularly the US and Europe, have left little investment opportunities, encouraging overseas Pakistanis to invest in lucrative avenues back home which will yield handsome returns.
According to the Economic Survey 2009-10, around seven million Pakistanis live abroad, who are expected to send $11 billion of remittances this fiscal year.
However, Schehzad cautioned that there are risks and benefits too. If the government utilises the borrowed money effectively, then it will pay in the long term. Otherwise, the state will get trapped in a vicious debt cycle.
The writer is incharge Business desk for The Express Tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, April 4th, 2011.
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