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Pakistan’s public debt stock increased by Rs.2268 billion due currency depreciation in 1st half of CFY

ISLAMABAD (Eshfak Mughal):- The Finance Ministry has claimed that the total public debt stock was increased by Rs.2.268 trillion due to 11 percent depreciation of local currency against foreign currencies during the first half of the current fiscal year.

The Finance Ministry has issued Public Debt Bulletin July-December 2022 on Friday. According to the report, the USD was appreciated by Rs.22 to Rs226 from Rs204 during the first half of the current fiscal year.

The bulletin covers the assessment of the progress in comparison with the Medium-Term Debt Management Strategy (MTDS). The document also serves government’s commitment to transparency, accountability and access to information by the general public.

Total Debt of the Government” means the debt of the government (including the Federal Government and the Provincial Governments) serviced out of the consolidated fund and debts owed to the IMF less accumulated deposits of the Federal and Provincial Governments with the banking system.

According to the document, the public debt stock of the country was increased by Rs3527 billion to Rs52.721 trillion from Rs49.194 trillion during the first half of the current fiscal year. The internal public dept was increased by Rs.2.079 trillion from Rs.31.037 trillion to Rs.33.116 trillion and external debt was increased by Rs1.448 trillion from Rs.18.157 trillion to Rs.19.605 trillion during the period.

The impact of other economic flows during July-December 2022 was mainly due to PKR depreciation against USD by almost 11 percent which resulted in increase in Total Public Debt by RS.2.268 trillion, the document shows.

The document shows that the burden of debt servicing on public debt is increasing with high speed during the recent years. The public debt was increased by Rs2573 billion only due to debt servicing during the first half of the current fiscal as compared to Rs.1,453 billion during the same period of the last fiscal year.

The report indicates that the high levels of external debt can pose severe challenges in times of high current account deficit, low foreign exchange reserves, and volatile exchange rate. Large external payments in the wake of low foreign exchange reserves can pose liquidity problems and even destabilize the exchange rate which in turn can increase the burden of external loans measured in local currency. Containing the exposure to external debt is important to manage the exchange rate risk.

The share of external debt in total public debt stood at 37.2 percent at end December 2022. However, the depreciation of the Pak Rupee over last 4 years against international currencies has resulted in a higher value of external debt when translated into local currency. Nevertheless, the external debt exposure is still within the maximum limit of 40 percent as envisaged in the e Medium-Term Debt Management Strategy (MTDS).

The report shows that the share of shariah-compliant debt in government securities increased to 9.2 percent during the first half of the current fiscal year as compared to 6.4 percent during the same period of the last fiscal year. The same ratio stood at 8.6 percent at end June 2022.

The Finance Ministry has set a benchmark (minimum limit) of 25 percent for the share of fixed-rate debt within the domestic government securities. However, no such benchmark or target has been set for external debt because the share of fixed-rate debt with external debt is already quite high (around 70 percent).

The reason behind setting lower benchmark and target for fixed-rate debt within domestic government securities is that the demand for fixed-rate debt among the domestic investors is relatively low.

Domestic financial markets are dominated by commercial banks which have a strong preference for floating-rate debt because their liabilities are mostly of a floating-rate type. Also, the lack of price stability in the past has led to a lowering of investor demand for long-term fixed-rate government securities in general.

Until the market share of investors (such as insurance companies and pension funds) with a clear preference for long-term fixed-rate instruments increases significantly, and the government’s performance in the area of price stability improves substantially, it is appropriate to set realistic targets for this indicator. With inclusion of more diversified investors, the targets will be revised accordingly.

 Although in recent years, MoF has raised significant amounts through long-term fixed-rate securities, their proportion in total government securities has remained around 30 percent.

Due to high borrowing needs, and high & rising domestic interest rate environment during July-December 2022, larger amounts were raised through floating-rate debt. The Finance Ministry will continue to consider its strategic benchmarks and targets as well as the economic developments and outlook while setting the monthly auction targets and issuing long-term fixed-rate domestic government securities through public auctions.

The Finance Ministry will also work closely with State Bank of Pakistan and Securities and Exchange Commission to take the Public Debt Bulletin (July-December 2022) Debt Bulletin & Annual Debt Review (2021-22) 6 steps necessary to increase competition in the financial markets and increase the size and market share of other participants such as insurance companies and pension funds. The Ministry will also advise and assist the government in lowering of fiscal deficit and adoption of policies that lead to price stability and lowering of long-term inflation expectations.

These steps will increase the efficiency of financial markets in allocation of resources, generate higher demand for long-term fixed-rate government securities, and enable the government to set and achieve higher targets for fixed-rate government securities.   

The Federal Government carried out gross issuance of around Rs.4.0 trillion of Pakistan Investment Bonds, out of which, 81 percent was through floating rate bonds. The total repayment against PIBs was PKR 1.7 trillion (including repayments against SBP Debt). The Govt also issued PKR 364 billion of Ijara Sukuk instrument, predominantly with variable rate of return. The retail debt instruments i.e., National Saving Schemes (NSS) witnessed a net outflow of PKR 240 billion.

The Asian Infrastructure Investment Bank (AIIB) co-financed the BRACE program to the tune of US$ 500 million, over and above the BRACE amount. The Saudi oil facility amounting to US$ 600 million was utilized (US$ 100 million each month). The China SAFE deposit of US$ 1,000 million and Saudi Time deposit of US$ 3,000 million was successfully rolled over The Govt repaid international commercial loans to the tune of $3.722  billion, out of which $ 2,722 million were bank loans and $ 1,000 million was international Sukuk maturity.

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