Debt ser­vic­ing

The Pak Banker - - 4EDITORIAL -

THE ris­ing pile of do­mes­tic debt is putting an un­bear­able strain on the na­tional econ­omy. Ac­cord­ing to a re­cent re­port of the State Bank, the govern­ment paid Rs541 bil­lion to ser­vice the do­mes­tic debt dur­ing the first half of the cur­rent fis­cal year. This amount was slightly higher than Rs534 bil­lion paid dur­ing the same pe­riod of the pre­ced­ing year. Though the in­ter­est rate has fallen sig­nif­i­cantly now as com­pared to the first half of FY15, the mas­sive govern­ment bor­row­ings dur­ing the first half of 2015-16 pushed up debt ser­vic­ing .It is rel­e­vant to note here that the stock of govern­ment do­mes­tic debt in­creased by Rs685bn dur­ing the July-De­cem­ber pe­riod of the cur­rent fis­cal year, while the to­tal debt and li­a­bil­i­ties rose by Rs864bn dur­ing first quar­ter of FY16. No won­der, SBP's Mon­e­tary Pol­icy Com­pen­dium for Jan­uary 2016 did not re­port any im­prove­ment on the bor­row­ing side or debt ser­vic­ing.

Most of the bor­row­ing stems from the need to main­tain lower fis­cal deficit as re­quired un­der an agree­ment with the In­ter­na­tional Mon­e­tary Fund. Fis­cal deficit was recorded at 1.1 per­cent of GDP dur­ing the first quar­ter of FY16 com­pared to 1.2 per­cent in the first quar­ter of FY15. Ac­cord­ing to SBP, "Dur­ing FY16 so far, govern­ment bor­row­ing needs were en­tirely met from sched­uled banks." Since the rev­enue col­lec­tion has failed to meet the tar­gets set in the pre­vi­ous bud­gets, the govern­ment would con­tinue to keep bor­row­ing, which will again in­crease debt ser­vic­ing.

Ris­ing debt ser­vic­ing con­tin­ues to eat into govern­ment's rev­enue - it paid Rs1.175 tril­lion dur­ing the fis­cal year 2014-15. In­ter­est pay­ments on ex­ter­nal debt in­creased to Rs109.9 bil­lion from Rs91 bil­lion in the pre­vi­ous fis­cal year. Ac­cord­ing to the State Bank, Pak­istan's ex­ter­nal debt ser­vic­ing rose to an alarm­ingly high level of $7 bil­lion in FY14. The to­tal amount paid in debt ser­vic­ing last year in­cluded $5.910bn as the prin­ci­pal amount and $915 mil­lion as in­ter­est. The over­all ex­ter­nal debt and li­a­bil­i­ties stood at $65.6 bil­lion dur­ing FY14. Debt ser­vic­ing is mainly on ac­count of pub­lic guar­an­teed debt. Th­ese loans were ob­tained from mul­ti­lat­eral and bi­lat­eral donors. How­ever, the re­main­ing pay­ment was made to the In­ter­na­tional Mon­e­tary Fund .

A mat­ter of spe­cial con­cern is that 47 per­cent of what­ever the govern­ment gen­er­ates in rev­enue is used to pay off debt. The in­ter­est pay­ments on do­mes­tic debt are ris­ing each year - the govern­ment has paid Rs3.123tr since 2013 - be­cause of large ac­cu­mu­la­tion of debts through Pak­istan in­vest­ment Bonds (PIBs) and trea­sury bills (T-bills). Banks and the cor­po­rate sec­tor jointly hold PIBs, T-bills and sukuk worth over Rs7tr which re­quires mas­sive debt ser­vic­ing, which is about 40 per­cent of the govern­ment's rev­enue col­lec­tion.

In­de­pen­dent econ­o­mists are crit­i­cal of the govern­ment's bor­row­ing strat­egy which they say has failed to in­duce eco­nomic growth. Be­cause of se­vere short­age of rev­enue the govern­ment is com­pelled to bor­row more from both ex­ter­nal and do­mes­tic sources. Dur­ing the last two years, the govern­ment added Rs3.526tr to the do­mes­tic debt, which was Rs19.914tr at the end of FY15. Ac­cord­ing to a re­port, the debt and in­ter­est re­pay­ments would fur­ther rise by next year when the coun­try's re­pay­ment to the IMF in­creases.

Ex­perts fear that that ex­ter­nal debt obli­ga­tions are likely to en­dan­ger Pak­istan's debt pe­ofile, adding pres­sure on the coun­try's for­eign ex­change earn­ings in the medium-term. The coun­try's debt has grown since 2007, with suc­ces­sive gov­ern­ments mak­ing huge bor­row­ings, push­ing the coun­try to­wards a debt trap. As of March 2015, the to­tal debt li­a­bil­i­ties of the coun­try stood at Rs19,299.2 bil­lion. The debt-to-GDP ra­tio stands at 66.4 per­cent. Ideally, this ra­tio should be less than 30 per­cent in or­der to al­lo­cate more re­sources to the so­cial sec­tors.

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