KARACHI, March 10: The government on Monday cut the withholding tax on profit of Pakistan Investment Bonds (PIBs) from 30 per cent to 10 per cent for foreign investors.

Market experts said that the slashing of withholding tax on PIBs might prove to be a breakthrough in efforts for the development of bonds market in the country and to attract significant foreign investment.

Bankers said the decision was taken after prolonged efforts by senior bankers but the main reason for it was State Bank’s strong resistance against the massive borrowing by the government from the central bank.

The SBP has been advising the government to activate the bonds market and stop borrowing from the bank, which failed in its effort to control the inflation. However, the inflationary budgetary borrowing crossed all limits during the last eight months of the current year.

“The government did not earn a single penny from the 30 per cent withholding tax on PIBs purchased by the foreign investors,” said a senior foreign banker. He said the latest decision, which reduced the withholding tax to 10 per cent, could attract foreign investment.

Pakistan badly needed foreign exchange as high oil prices have started eroding its reserves making the local currency more vulnerable and weakening the economy.

The PIBs and other security papers offer much higher attraction than the prevailing low-return trend in the developed economies.

The PIBs offer 11 per cent for ten years maturity, which is highly attractive in the wake of drastic cut introduced by the Fed Reserves of the United States, which is a benchmark for the international interest rates.

The recent debacle of Sub-prime mortgage in the US, which flushed out liquidity from most of the hot equity markets of the developed economies, forced both the US Fed and European Central Bank to cut the interest rates and provide more liquidity to the market.

The Fed cut the interest rate to 3 per cent and more cut is expected by mid of this month, which means investing in US Treasury bills, would be like losing the value of investment as inflation in the US is higher than the return.“This US scenario is helpful for Pakistan to develop its Bond market but the country needs to reflect some political stability,” said Mohammad Imran, head of research at First Capital Equity.

Atif Malik, another senior researcher at JS Securities, said the attraction of PIBs at 11 per cent would certainly lure the investors.

A number of bankers, who are the Primary Dealers, said the glut of wealth in the developed markets had already diverted its direction towards Asia.

They said during a year the record high oil prices had created surplus liquidity in the Arab world, which love to keep their wealth in the Western banks or invest in the US Treasury bills. The fund managers of oil wealth have made huge investment in the recent months in Asian economies like India, China, Hong Kong, Singapore and Malaysia.

“We believe this surplus liquidity could touch our land if the attractions are exposed to the international market,” said a senior banker.