Pakistan Debt Reforms
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Transcript of Pakistan Debt Reforms
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8/13/2019 Pakistan Debt Reforms
1/1
In June 2006, the Dept Capital Market Committee (DCMC) was formed by the
Securities and Exchange Commission of Pakistan to help identify the major factors
that have hindered the development of a comprehensive, broad based debt market
in the country. While Pakistan has seen growth in the securities market, the debt
market continues to be neglected. Our Financial Asset to GDP ratio stands at a
mere 100 % as compared to the global average of 315%. This low level of leveragereflects poorly on the growth and vibrancy of our economy that needs an efficient
debt market in order to flourish. For this purpose the DCMC was handed the task
of coming up with a strategy to expand the debt market and make it the preferred
choice for investors.
One of the major reasons for the slow growth of the debt market is the absence of
a fixed benchmark interest rate on standard, government issued debt securities.
Without the existence of this rate, it is difficult for a long term debt market to
function as interest rates on long term FAs are usually based on the risk free rate.
The DCMC proposed that it be vital for the GOP to improve its debt managementstructure so that it can be viewed as a strong and frequent borrower. The basic
requirements for this would be to stop the artificial suppression of government
debt yield by increasing the supply of government bonds, making them more
predictable and attracting a reliable network of institutional investors. This
enhanced image would fuel growth on the supply side encouraging corporations to
issue bonds and long term debt securities. Only when there are assets available to
invest in can the institutional investor base (consisting of mutual funds, asset
management companies, pension funds) be expanded.
The National Saving Scheme is another factor that hampers the growth of an
efficient debt market in Pakistan. The products that the NSS offers are at highlysubsidized rates, making it difficult for comparable market securities to compete.
Apart from this, the second biggest reason for the problem at hand is the minimal
supply of corporate bonds. Corporations rely mostly on bank loans to meet their
debt requirements. In order to encourage private investment, credit rating
agencies need to be developed to provide confidence in the credit worthiness of
corporate bonds and banks role as the intermediaries between investors and
corporations should be eliminated. Corporations should also be encouraged to
raise capital through the debt market and this can be done by improving the TFC
pricing process and removing red tapism in the issuance process.