Pakistan allows provinces to issue bonds
Thursday, 21 January 2010
ISLAMABAD, Jan 20 (Business Recorder): In a major policy shift, the federal government has allowed the cash-hungry provinces to issue bonds to raise funds directly, after due consultation with the economic affairs division (EAD) and the State Bank of Pakistan (SBP), official sources told the reporter.
This decision is meant to give independence to the provinces which are unwilling to accept conditions of lending imposed by the federal government.
Sources said that the economic co-ordination committee (ECC) of the cabinet on January 12, 2009, was apprised that in pursuance of the ECC's decision, arrived at in its meeting on August 11, 2009, the EAD had developed viable options for revision of 're-lending policy' for foreign loans/credits.
Provinces may avail re-lending of foreign loans on the same terms and conditions on which loans are signed by the GoP, the exchange risk cover (ERC) will have to borne by the provinces.
They may avail ERC from the GoP, then they will have to get lending of foreign loans as per formula approved by the ECC in its meeting on March 3, 2009 ie by paying 12 per cent interest rate per annum (5.2 per annum interest rate and 6.8 per cent per annum ERC fee). The provinces get ERC hedging from the commercial banks and open market and may avail re-lending from the GoP on last three primary auctions moving weighted average cut-off yields or related tenor's Pakistan Investment Bonds (PIBs).
This effectively determines the rate at which the GoP is borrowing funds from the domestic market for the long term and represents actual cost to the GoP, sources added. They said that these options were discussed at a meeting attended by the representatives of SBP and those of provincial governments. However, the meeting remained inconclusive.
This decision is meant to give independence to the provinces which are unwilling to accept conditions of lending imposed by the federal government.
Sources said that the economic co-ordination committee (ECC) of the cabinet on January 12, 2009, was apprised that in pursuance of the ECC's decision, arrived at in its meeting on August 11, 2009, the EAD had developed viable options for revision of 're-lending policy' for foreign loans/credits.
Provinces may avail re-lending of foreign loans on the same terms and conditions on which loans are signed by the GoP, the exchange risk cover (ERC) will have to borne by the provinces.
They may avail ERC from the GoP, then they will have to get lending of foreign loans as per formula approved by the ECC in its meeting on March 3, 2009 ie by paying 12 per cent interest rate per annum (5.2 per annum interest rate and 6.8 per cent per annum ERC fee). The provinces get ERC hedging from the commercial banks and open market and may avail re-lending from the GoP on last three primary auctions moving weighted average cut-off yields or related tenor's Pakistan Investment Bonds (PIBs).
This effectively determines the rate at which the GoP is borrowing funds from the domestic market for the long term and represents actual cost to the GoP, sources added. They said that these options were discussed at a meeting attended by the representatives of SBP and those of provincial governments. However, the meeting remained inconclusive.