ISLAMABAD (February 14 2005): The State Bank is planning to introduce legal changes in relevant laws in order to start trading of government bonds and securities at stock markets. This amendment would bring retail investors into government bonds and securities trading. It would also help reduce bank's leverage which places pressure on the interest rates, sources told Business Recorder.
The government would also be able to attract extra funds for its needs. It has recently been facing shortage of funds to meet its credit requirements when the public interest eroded from low national saving rates. The bonds were earlier traded only in interbank market.
The annual addition in national saving schemes was Rs 40-50 billion which recently even turned negative for a year. This huge amount of funds is flowing towards equity market where the extra liquidity is making new records by breaking psychological barriers every other day.
Funds are also flowing abroad for real estate investment after domestic market prices have gone unimaginably high and asset market was surfeit with money.
As the country also needs depth in local financial and capital markets the government instruments would help deepen the market.
The State Bank has been in consultation with Finance Ministry, stock markets, Securities and Exchange Commission of Pakistan (SECP) and other relevant institutions as well as drawing global experiences for this new measure. Government securities are globally considered illiquid.
“Though the measure would take some time to introduce required changes in the law and the system, it would be a healthy exercise. We do not think that SECP or stock markets are going to block this move,” said a government official.
Despite higher revenue collection, government credit needs went higher during last two years when it prepaid huge debts and it had to increase its development expenditures. It needed to get extra Rs 60 billion for the prepayment a year ago, which put pressure on the market.
Another consequence of this move would add a new variable of stock market liquidity beside only money market liquidity for determination of the local interest rates. Although globally in economic theories the local interest rates are determined by the entire available liquidity, movement in stock markets and inflation, Pakistan's market, however, remained perfect in this regard, where interest rate movements were never so responsive to the moves in relevant variables.