NEW GOVERNMENT BOND INCREASE GOVERNMENT DEBT RECORD
According to the Ministry of Finance in the budget book, total government debt stood at SR 7,643,411,000 as at the end of December 2006. This was SR 1,572,163,000 more that the outstanding government debts at 31 December 2005 which was SR 6, 071,251,000. The international bond alone added SR 1,098,620,000 to the new debts.
This week the Government has published details in the Gazette of a new bond issue in the domestic market to raise SR 30,000,000. But the new bonds will pay less interest than those issued to international investors on the foreign currency denominated bonds issued last year, which raised US$ 200 million. Anyone who wants to buy the rupee denominated bonds, however, will have to hold them until 2017 before they can be cashed. The dollar bonds will be redeemed in 2011, the year of the next presidential election.
A bond is, of course, a debt instrument. It is a liability for the government but an asset for the bond holders. In a modern and developed financial system, bonds are bought and sold on a daily basis on the financial markets. The price these bonds are sold for depends on the interest (or coupon) payable on its face value as well the life or term left before they are cashed back. This combination determines the yield of the bond or from the view of the investor, the return on their capital invested.
Unlike the international bond arranged by Lehman Brothers, the investment bank, the rupee denominated bond being issued will not be bought or sold on a financial market.
But the new rupee denominated bond issue will increase the total government debt further. But debts have to be serviced. In 2006 Government paid out SR 311 million in interest on its debts, according to the budget book. This sum represents 14.6% of the total expenditure for the year but 33% of the expenditures of Ministries and Departments. Annual interest costs on government debts are almost as much as the total expenditures of the Ministry of Education and Ministry of Health combined. Interest costs on government debts are 7.5% of the estimated GDP for 2006, a heavy burden for a small economy to carry.
Contrary to the government’s propaganda, things have never been so bad despite the perception of economic growth due to foreign investment in tourism. Even SBC could not understand why there are fewer calendars published this year compared to previous years when many businesses used to publish their own calendars. Of course, the currency remains non-convertible and the black market rate has gone up. The X-ray at