Vibrant bond market needed for infrastructure projects: SBP

Corporate debt market still to make a mark in country.

Our Correspondent March 05, 2012


State Bank of Pakistan (SBP) Governor Yaseen Anwar said on Monday that a vibrant bond market was necessary to finance long-term infrastructure projects in the country.

Talking to journalists on the sidelines of the International Conference on Long-Term Debt Financing organised by the Finance Society of the Institute of Business Management (IoBM), Anwar said Term Finance Certificates (TFC) – a corporate debt instrument issued by companies to generate short and medium-term funds – and the National Saving Schemes (NSS) were fairly useful, but the secondary market could not become efficient without making long-term financing alternatives available, especially for infrastructure development projects.

He expected the corporate debt market to take root in the next two years. “A strong corporate debt market will reduce the cost of borrowing, benefit the customer, and make inflation manageable.”

Engro Corporation is one of the few local companies to opt for the retail debt market to raise funds by issuing Term Finance Certificates (TFC). The first issuance in 2010 was so successful that the conglomerate went for another TFC offering a year later.

By definition, the bond market includes corporate debt securities and government-issued securities, and facilitates the transfer of capital from savers to the issuers or organisations requiring capital for government projects, business expansions and ongoing operations.

Anwar also called for addressing structural problems that limit the effectiveness of the financial market. “There’s a need to rationalise the NSS, as its terms are too flexible,” he said while referring to its premature encashment option.

As a percentage of the gross domestic product (GDP), the government-issued securities in Pakistan are worth 4.4% while the figure for the private sector is only 0.9%.

Addressing the conference earlier, the SBP governor said capital destruction was taking place worldwide, which hindered the flow of capital into Pakistan. “That means we have to work harder. We have to deepen our capital debt market to finance our infrastructure projects.”

After noting that Pakistan’s fiscal deficit should be reduced, Anwar hastened to add that it was not unmanageable. “Our challenges are hardly insurmountable. I can see the light at the end of the tunnel, and it’s not an oncoming locomotive.”

Asian Development Bank Senior Fiscal Specialist Dawn Rehm said a structural imbalance with a reliance on bank financing came into being in the absence of a robust bond market. She said people looked towards the government for infrastructure development while tax revenues alone were not the ideal source of financing long-term infrastructure projects.

“The bond market supports appropriate matching between maturity of borrowing and the gestation period of the project,” she said, adding the private-public partnership model should be adopted to support long-term infrastructure projects.

Rehm also underlined the need for a market-determined, as opposed to government-determined, bond market with the maturity of 10 to 20 years as a basis for pricing corporate debt besides effective central bank supervision.

Speaking on the occasion, Arif Habib Group Chairman Arif Habib said there was a dearth of credible borrowers in Pakistan. “There’s actually a lot of liquidity with banks, but there aren’t many borrowers.”

Secondly, he said, banks in Pakistan lend at whim because they lack the ability to evaluate projects. He added that bad regulations and a lack of law enforcement made lenders extra cautious. “Lenders don’t have faith in the legal system of Pakistan.”

Published in The Express Tribune, March 6th, 2012.

CORRECTION: An earlier version of the story erroneously mentioned that Dawn Rehm is ADB's Country Director for Pakistan. That is not her correct designation and she is a Senior Fiscal Specialist at the bank. The correction has been made. 


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