<u>Overview of Pakistani Bond Market</u>

The bond market in Pakistan is dominated by the Government. It consists of debt and debt like securities mainly issued by the Government. Other important bond market players in Pakistan are statutory corporations and corporate entities. The secondary market trading takes place in the   Government bond market. The Government of Pakistan had been financing its large fiscal deficits with domestic debt. Domestic debt comprises of permanent debt, floating debt and unfunded debt. Government sells short term Government of Pakistan Market Treasury Bills (MTBs) to raise floating debt, and long term Pakistan Investment Bonds (PIBs) to raise permanent debt. Unfunded debt is raised by different saving schemes.

<u>Characteristics of Government Debt Securities</u>

<u>Market Treasury Bills</u>

Market Treasury Bills (MTBs) are short-term debt instruments issued by the Government of Pakistan with 3-months, 6-months and 1-year maturity.  Individuals, institutions, banks and corporations can buy these securities. There is always an option of selling these bonds in secondary market.

<u>Pakistan Investment Bonds</u>

Government of Pakistan launched Pakistan Investment Bonds (PIBs) in December 2000. PIBs are the only long term debt securities issued by the Government since the termination of Federal Investment Bonds (FIBs) in June 1998. PIBs usually have five tenors of 3, 5, 10, 15 and 20-years maturity. Like MTBs, they are also available for sale to individuals, institutions banks and other corporations.

<u>Pakistan’s Latest Venture into International Bond Market</u>

Pakistan holds a B-plus rating in the international debt capital market. In May 2007, the country sold $750 million worth of PIBs with a tenor of 10-year maturity in the international bond market. The demand for PIBs was worth $3.5 billion, seven times higher than the PIBs issued by the Government of Pakistan.

In February 2008, Government of Pakistan again asked local and international banks to put forward proposals for a sovereign bond issue. International banks’ list included big players like ABN AMRO, Citigroup, Deutsche Bank, HSBC, and UBS.

<u>A Brief Analysis of Pakistani Economy</u>

Pakistani economy faced big crisis, one after another during the year 2007. Foreign exchange reserves were recorded at $14.063 billion in the week that ended on March 1, down 14.7 per cent from an all-time high of $16.486 billion on Oct 31, 2007. Other macro-economic fundamentals also appear a bit off-putting for the country. High inflation, a heavy trade deficit, rising international oil prices, food shortage and domestic energy crisis, all is hampering the economy to flourish adequately. Moreover, the tax deduction on the profit payments was also quite high in the past. Despite the fact that the Pakistani stock exchanges appear to be quite promising, international analysts are not very optimistic about the local debt securities market. Risk-averse investors do not show much interest in purchasing Pakistani debt securities.

<u>Pakistan Strives to Attract Foreign Investment in Bonds by Cutting Tax</u>

To increase the demand for The Government’s debt securities, Pakistan has announced a tax cut on the profits earned by the foreign investors holding Pakistani debt instruments. On March 10, 2008 Caretaker Finance Minister of Pakistan, Salman Shah declared that the government trimmed down the tax charged on foreigners investing in bonds from 30 per cent to 10 per cent. Now the international investors are supposed to pay 10 per cent on the profit payments, which is exactly equal to the tax paid by the local investors. Bankers and analysts inferred that this tax cut would increase the yield on Pakistani debt instruments for foreign investors, and ultimately make Pakistan Investment Bonds (PIBs) and Market Treasury Bills (MTBs) a more lucrative investment option for them. As a result, Pakistani government is hoping to see its foreign reserves go up and looking forward to using the rupee equivalent to finance the fiscal deficit.

<u>Summary</u>

Pakistan Investment Bonds (PIBs) and Market Treasury Bills (MTBs) are debt instruments, issued by the Pakistani Government for long term and short term borrowing respectively. The country’s economy is going through a rough phase, so unlike the local stocks, Pakistani debt securities are not considered as a hot investment choice by many international risk averse investors. My opinion is a bit different. I think that the investors would show high affinity for these securities, the way they responded to the previous deal in May 2007 amid political turmoil in the country. Most of the macro-economic problems cropped up due to inefficient handling and mismanagement of Government affairs by the previous Government. Now that the Pakistani nation is seeing a silver lining, as for the first time in the political history of Pakistan, two arch rivals of politics are vowing to get along with each other for the betterment of the people of Pakistan, there is no reason why one should be skeptic about the future of the country’s economy. Moreover, after the generous tax cut on the profit earned by the foreign investors, the profit margins will increase significantly for the international investors.