Managing the debt: How one little office can ruin a nation’s finances

The Debt Policy Coordination Office has been unable to devise a plan to manage the public debt.


Shahbaz Rana July 10, 2011

ISLAMABAD:


“Mismanagement” at one small office at the finance ministry has left the country in a precarious financial situation where the government needs to refinance Rs2.9 trillion in debt every year and pay far higher interest rates.


The Debt Policy Coordination Office, established under an act of parliament in 2005, has become the epitome of financial mismanagement of the current administration. The litany of the office’s mismanagement can be found in reports issued by the International Monetary Fund (IMF), the State Bank of Pakistan and even the finance ministry itself.

The office was established after a report on the public debt, written by Dr Pervez Hasan, a former vice president at the World Bank. The report also formed the basis of the Fiscal Responsibility and Debt Limitation Act of 2005.

The Act required the government, specifically the debt policy office, to come up with a plan to limit the public debt and formulate a strategy for reducing it. Far from formulating such a policy, the office has allowed the public debt to grow by 88% in three years and severely shortened the average maturity of the debt.

About 54% of the total rupee-denominated debt is now short-term, up from 34% in June 2008. The shorter maturity of the debt means that the government needs to constantly refinance the debt and is exposed to sudden shifts in interest rates, which increases the cost of servicing the national debt.

In fiscal year 2011, the cost of servicing the domestic debt jumped by Rs32 billion beyond its initially allocated Rs621.6 billion, mostly due to a rise in interest rates.

The situation is described in the State Bank’s quarterly report, in the central bank’s usual understated language: “The maturity profile of domestic debt reveals that the government has to rollover the entire stock of Rs2.9 trillion of short term debt at least once a year. Any surge in credit demand from other sectors of the economy could elevate rollover risk and could also expose the government to interest rate risk.”

Finance ministry spokesman Rana Assad Ameen admitted that overspending on domestic debt servicing and rolling over Rs1.7 trillion in debt (which the government had to do last year) did have a negative impact on the budget.

Finance ministry officials are hesitant to speak on the record about the matter but admit that the major banks colluded to force the government to either borrow at short-term maturities or pay higher interest rates. Yet many experts believe that, had the government diversified its borrowing sources as it is required to do under the Debt Limitation Act, it would not have been able to have effectively been blackmailed by the bond market.

Even those who have been part of the debt policy office management have criticised its current administration.

“The debt office delayed the scheduled auction of Pakistan Investment Bonds, a source of long term debt, and that increased the short-term debt,” said Dr Ashfaque Hasan, the former director general of the debt policy office.

The current director general of the office is Masroor Qureshi, an employee of the National Bank of Pakistan, on secondment to the finance ministry. Qureshi’s academic qualifications include an MBA. But the Debt Limitation Act clearly requires that a “macroeconomist” be the head of the office, implying a minimum of a PhD in economics as the requisite qualification for the office.

“If a person is not qualified how could he manage the office?” said Qureshi’s predecessor, Dr Ashfaque Hasan, who holds a PhD in economics from Johns Hopkins University in the United States.

The government has tried to amend the criterion for hiring the head of the debt policy office, but was unable to do so after facing strong resistance from the economic affairs division within the finance ministry and the State Bank of Pakistan.

The debt office management complains that it does not enjoy operational independence from the finance ministry, which they feel absolves them of the charge of mismanagement.



Published in The Express Tribune, July 10th, 2011.

COMMENTS (10)

Hedgefunder | 12 years ago | Reply Even if there were sound Economists in Pakistan, they will have difficulty working as we have the current situation at the Helm of SBP. These Political Mafia's sole agenda is to please the Vote Bank to ensure their stay in power, without even considering the very basic problems that their policies have led to Country's Demise in terms of fiscal and economic policies.
akbar | 12 years ago | Reply we need economists like the bangladeshi muhammad yousuf
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