Charter of the Economy 12.6. Managing the Government Debt The following recommendations are made on the composition of public debt, tenure of borrowing, interest rates and borrowing in the domestic capital market. Utilizing the Scope for‘Seigniorage’: This is the extent of expansion in money supply, which is non-inflationary in character, which depends on the magnitude of increase in the transactions demand for money as the economy grows. Various estimates have been made of the scope for‘seigniorage’ in Pakistan. They range from 0.75 percent to 1.0 percent of the GDP. As such, it is recommended that the Federal Government limit its borrowing to this extent directly from the SBP. This will be effectively at zero cost as the interest paid will revert to the Government in the form of SBP profits. External borrowing should be linked to External Financing Requirements: The risks associated with the portfolio of Government debt are associated with the share of external debt. Therefore, the level of external borrowing should be limited to the level of required external financing as estimated in Chapter 4. Clearly, preference should be for relatively low cost and long-term multilateral and bilateral borrowing. If, however, there is an unanticipated increase in the requirement of external financing then there may be more borrowing from international Commercial Banks. Annually, there may also be an attempt to float Euro/Sukuk bonds of$2 to$3 billion to maintain Pakistan’s presence in the international capital market. Tenure of Government borrowing linked to the Rate of Inflation: The policy should be to avoid a‘lock-in’ by floating high level of PIBs to avoid relatively high interest payment for the duration of the PIBs floated. As a rough and ready guidance, the tenure of Government borrowing may be distributed as follows: If inflation rate high at above 8 percent: · Share: PIBs, 35 percent; MTBs, 50percent; Government Saving Certificates, 15 percent If inflation rate low at below 8percent: · Share: PIBs, 50 percent; MTBs, 35 percent; Government Saving Certificates, 15 percent PIB= Pakistan Investment Bond, MTB= Market Treasury Bill Steeper Yield Curve on Savings Certificates: Inflows into unfunded debt could be less inflationary in character if they are purchased with accumulated savings of households. This should be encouraged by‘locking in’ investors into long term savings certificates of 10 to 15 years maturity with a steeper yield curve. Also, a retail market could be developed for PIBs and MTBs. 126