Debt bur­den

The Pak Banker - - FRONT PAGE -

The State Bank of Pak­istan's lat­est cen­tral gov­ern­ment debt bul­letin for the pe­riod of July-Fe­bru­ary has re­vealed that the fed­eral gov­ern­ment's debt grew at dou­ble-digit pace to Rs22.9 tril­lion, a net ad­di­tion of Rs2.14 tril­lion in just eight months, far higher than the an­nual bud­get deficit limit par­lia­ment ap­proved at the start of the fis­cal year. Ac­cord­ing to the bul­letin, the fi­nance min­istry in­curred the debt, which was far more than it was re­quired, aban­don­ing the path of fis­cal pru­dence. For the cur­rent fis­cal year 201718, par­lia­ment had ap­proved the bud­get deficit tar­get of 4.1% of GDP or Rs1.48 tril­lion. How­ever, the net ad­di­tion of Rs2.14 tril­lion to the fed­eral gov­ern­ment debt in just eight months was equal to 6% of GDP.

A main rea­son for this was that in De­cem­ber the gov­ern­ment de­val­ued the ru­pee against the US dol­lar by 5%, which in­creased the ex­ter­nal debt in ru­pee terms. How­ever, SBP's first-half re­port also re­vealed an­other pat­tern. The do­mes­tic bor­row­ings also in­creased slightly dur­ing the pe­riod due to the buildup of gov­ern­ment's de­posits with the bank­ing sys­tem, which in­creased to Rs168.3 bil­lion dur­ing the first half of the fis­cal year. In a foot­note, the SBP said that dur­ing the first half of the last fis­cal year, the buildup of de­posits was only Rs33.1 bil­lion. How­ever, the sta­tus of the gov­ern­ment's de­posits for July-Fe­bru­ary pe­riod was not known.

No won­der, the grow­ing debt bur­den has trig­gered a na­tional debate on sus­tain­abil­ity of the coun­try's macroe­co­nomic frame­work. The fed­eral gov­ern­ment's to­tal do­mes­tic debt in­creased to roughly Rs16 tril­lion - an ad­di­tion of Rs1.1 tril­lion or 7.4% in eight months. The do­mes­tic debt struc­ture un­der­went a dras­tic change, which has al­ready ex­posed the gov­ern­ment to re­fi­nanc­ing risks. The share of short-term pub­lic debt in­creased alarm­ingly to 50.7% or Rs8.1 tril­lion by the end of Fe­bru­ary. At the same time last year, the short-term do­mes­tic debt stood at 44% or Rs6.6 tril­lion. The short-term debt grew Rs1.53 tril­lion or 23.4% in eight months. The rise in short-term debt was the re­sult of grow­ing de­pen­dence on bor­row­ing through sale of mar­ket trea­sury bills (MTBs).

The fed­eral gov­ern­ment's to­tal bor­row­ing through MTBs in­creased to al­most Rs5 tril­lion, up 21.6% or Rs882 bil­lion in eight months. Sim­i­larly, the MTBs is­sued to re­plen­ish cash rose to Rs3.2 tril­lion, a net ad­di­tion of Rs652 bil­lion from July through Fe­bru­ary. The mount­ing short-term debt sug­gests that banks were not will­ing to pro­vide longterm loans in an­tic­i­pa­tion of in­crease in in­ter­est rates. An­other rea­son was that the fed­eral gov­ern­ment started re­ly­ing on the cen­tral bank for fi­nanc­ing its deficit, which changed the debt struc­ture.

The change in the com­po­si­tion of do­mes­tic debt sug­gests that the gov­ern­ment could not fully im­ple­ment its sec­ond Medium-Term DebtMan­age­ment Strat­egy 2016-19 that in­tends to lengthen the ma­tu­rity pro­file to re­duce the re­fi­nanc­ing risk. In con­trast to short-term debt, the coun­try's long-term debt de­creased 5.3% to Rs7.86 tril­lion. Its share was 56% in the to­tal do­mes­tic debt at the end of June 2017, which re­duced to 49.3% by Fe­bru­ary this year.

The share of bonds is­sued by the fed­eral gov­ern­ment shrank from Rs4.8 tril­lion to Rs4.2 tril­lion de­spite an over­all in­crease in pub­lic debt. A net re­duc­tion of Rs541 bil­lion or 11.3% in bonds' hold­ings in­di­cates that banks are not will­ing to lock funds for longer pe­ri­ods. How­ever, the debt ac­quired through the sale of prize bonds in­creased from Rs747 bil­lion to Rs808 bil­lion at the end of Fe­bru­ary 2018. The ex­ter­nal debt dur­ing the first eight months of the fis­cal year also in­creased by 17.6% to Rs7 tril­lion. There was a net in­crease of Rs1.03 tril­lion in the ex­ter­nal debt from July through Fe­bru­ary.

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