950819

Credit crunch calls

for well-developed

bond market: Jafarey

IKRAMUL HAQ

ISLAMABAD: Bond market in Pakistan is a sheer necessity in view of resource constraints of commercial banks and DFIs and static foreign assistance.

This was observed by V.A. Jafarey, Prime Minister's Advisor on Finance and Economic Affairs, while inaugurating one-day seminar on "Prospects of Bond Market in Pakistan", at a local hotel here on Saturday.

The seminar sponsored jointly by the World Bank and Corporate Law Authority was organised by Islamabad Stock Exchange.

Jafarey stated that because of the credit crunch "we cannot do without a well-developed bond and capital market". The bond market offers an advantage that it brings the borrowers in direct contact with the depositors. High return to the borrowers needs prudent manager of the funds.

Referring to the 11-point agenda provided by World Bank expert Ishrat Hussain, Jafarey said that macroeconomic stability was essential for the bond market to flourish. Jafarey stressed that the government is committed to a wide-ranging programme of structural reforms and was working for improving domestic savings, curbing inflation and reducing fiscal deficit and hoped the government would be able to achieve these goals.

In respect of the reforms of financial sector he said Pakistan has been able to implement almost all proposals of the Asian Development Report of 1988 on development of capital market in Pakistan.

One credit rating agency is already woking in the country while another is coming up shortly. The government has gone for bonds and Pakistan floated Euro bond. At the same time the government is encouraging the private sector to raise equity abroad and at home. The public sector corporations too have been asked to raise money at home.

Jafarey added that Wapda should rely more on capital market than commercial loans and foreign assistance. But here the main difficulty is shortage of domestic savings.

According to World Bank study Jafarey said average saving rate in East Asia is 37 percent, but in Pakistan it is only 15 percent or so.

He added that the government was trying desparately to reduce fiscal deficit but it will take some time. If budget deficit is curtailed, he was certain, the inflation rate too would go down.

He suggested that the seminar should address itself to the problem of mobilising money from the informal market.

Earlier Shamim Ahmed Khan, Chairman of CLA and Ahmed Sadiq, Resident Chief of the World Bank, spoke on the objective of the seminar and the need for developing a strong bond market in the country.

In his keynote address on "Prospects of Bond Market in Pakistan," Ishrat Hussain, Director of the World Bank, stated that bond market ensures a lucrative rate of return, better than the banks, and higher than inflation and overcomes the difficulty of investing in property where liquidity is not immediately available. Though bond markets offer some benefits, the risks are that due to policy slippages penalty by market may be more dangerous. Another risk is that inflationary pressure may erode the real rate of benefit. To guard against this strict management is imperative.

Ishrat Hussain who also wrote a report on the "Emerging Asian Bond Market" said that East Asia has registered a phenomenal growth in bond market and these would grow more rapidly in the next ten years.

According to the study, the total value of emerging market bonds in 1994 was estimated at 800 million dollars of which East Asia with 338 billion dollars accounted for 43 percent. The potential of growth of bond market is tremendous.

According to him the role model for Pakistan should be Korea, Malaysia and Thailand.

In his presentation, Ishrat Hussain listed a number of safeguards for proper development of bond market. The 11-point checklist is: emerging Asian market should have macroeconomic stability, liberal financial sector, strong predictable and enforceable regulatory framework, accelerated development of large institutional investors, steady stream of new issues, creation of benchmark for bonds, a well-developed network of financial intermediaries, credible rating agencies, sufficient liquidity to promote secondary market, efficient settlement and clearance arrangements and parity in taxes, fees and charges.

He also made it clear that no emerging bond market in Asia, has fulfilled all of these conditions.

He asserted these are directives for the government, the Corporate Law Authority and the investors to think about.

Commenting on the regulatory framework in Pakistan Ishrat Hussain was of the view that though a regulatory framework was not lacking, it lacked transparency which must be removed. Rules should be uniform for all. The framework should regulate rather than control or manage the market participants. There should be transparent public disclosures standards and a disclosure based system. Moreover bond issuance, trading and procedures for other transactions are neither cumbersome nor costly but also protect investor's interests. The accounting practices should conform to international standards and prompt action against insider trading and other malpractices should be taken.