Public debt management
Pakistan’s economy is showing visible signs of improvement
The writer is the finance minister of Pakistan
When the present government started its term in June 2013, it inherited various challenges like a large fiscal deficit, a rising debt burden, an unfavourable balance of payment, low foreign exchange reserves, poor growth in tax revenues with a shrinking tax base, swelling current expenditures, a gigantic circular debt problem that was unravelling the energy sector, among other major problems. On the external front, the major development partners had considerably scaled down their support due to waning economic fundamentals and the apparent inability of the country to service its external obligations in the near future. One of the main challenges was absence of external financing which was causing turbulence in the domestic exchange markets and tilting the composition of public debt towards domestic debt and that too into shorter maturities creating vulnerabilities and entailing high rollover and refinancing risks. The State Bank of Pakistan (SBP) forex reserves, which stood at $6 billion in June 2013, fell to $2.8 billion in February 2014. It was a highly precarious situation for the external account.
In early 2013, it had been predicted that Pakistan might default on its sovereign obligations if necessary steps to avert the situation were not taken. These predictions were made by financial experts, who had analysed the macroeconomic situation prevalent at that time and reached the conclusion that the country would not have sufficient external resources to meet its obligations of external debt beyond February-June 2014. There was a dire need for stemming the depleting reserves and stabilising a fast-depreciating currency, which touched Rs110.25 against the dollar on November 29, 2013, and which was fuelling inflation and raising the cost of debt servicing. The importance of lengthening the maturity profile of domestic debt became inevitable while maintaining interest rate stability and regaining growth momentum.
On assuming office, the present government took necessary steps for avoiding default, ensuring fiscal discipline and consolidation, stabilising a collapsing economy and accelerating growth. The government started revamping the economy through structural reforms and stabilisation measures such as reduction in un-targeted subsidies, broadening the tax base, restructuring public sector enterprises, building foreign exchange reserves and reducing the fiscal deficit, while ensuring that the social safety net and development spending are not only protected but enhanced considerably. A brief account of the improvement in major economic indicators over the period from June 2013 to June 2015 is given below:
1) FBR revenue increased from Rs1,946 billion in FY2012-13 to Rs2,588 billion in FY2014-15. The FBR is on course to achieve the revenue collection target in excess of Rs3,000 billion during FY2015-16.
2) The budget deficit was contained at 8.2% in FY2012-13 (down from a projected 8.8%) within weeks of assuming office. The deficit has been reduced to 5.3% in FY 2014-15. We are on track so far to reduce it to 4.3% for the FY2016.
3) Average inflation reduced from 8.62% in FY2013-14 to 4.53% in FY2014-15. Average CPI during the period July-February of FY2016 has been recorded at 2.48%.
4) Credit to the private sector, which was negative at Rs19.2 billion in FY2012-13, increased to Rs.208.7 billion in FY2014-15. During the current financial year, the amount has increased to Rs299.7 billion till February 12, 2016.
5) Credit to the agriculture sector increased from Rs336.2 billion in FY2012-13 to Rs515.9billion in FY2014-15. The target for the current FY2015-16 is Rs600 billion.
6) Development spending, which was Rs348 billion in FY2012-13, increased to Rs502 billion in FY2014-15. During FY2015-16, an amount of Rs700 billion has been budgeted.
7) Remittances increased from $13.9 billion in FY2012-13 to $18.7 billion in FY2014-15. During the current fiscal year, $12.7 billion were remitted till February 29, 2016.
The fiscal consolidation paved the way for a reduction in the debt-to-GDP ratio, which fell from 64% in FY2012-13 to 63.5% at the end of FY2014-15. In the next three fiscal years, our target is to bring down the debt-to-GDP ratio to 60% or less in accordance with the provisions of the Fiscal Responsibility and Debt Limitation Act (FRDLA), through effective debt management. Our government's vision is to further reduce the statutory debt limit from the existing 60% to 50% in 15 years, starting from FY2018-19 and to limit statutorily the federal fiscal deficit to 4% through introduction in parliament of an amendment bill for necessary changes in the FRDLA.
Despite these achievements, many detractors of the government are ceaselessly creating doubts about the country’s debt situation. There is, therefore, a need to set the record straight. Pakistan’s total public debt as of June 30, 1999 was Rs2,946 billion of which domestic public debt was Rs1,389 billion and external debt was Rs1,557 billion. Total public debt as of March 31, 2008 was Rs5,800 billion, which included domestic public debt of Rs3,020 billion and external debt of Rs2,780 billion. Public debt further increased to Rs14,318 billion by the end of FY2012-13, thereby the previous government contracted a net debt of Rs8,518 billion during its term 2008-13.
Pakistan runs a persistent fiscal deficit. For FY2012-13, its fiscal deficit was projected at 8.8% of GDP. It was due to a major effort during the last month of the FY2012-13 that we were able to contain it at 8.2%. Such a high level of fiscal deficit is unsustainable as it adversely affects economic growth and necessitates larger amount of borrowing to meet the fiscal gap.
The government started its first fiscal year in 2013 with inherited total public debt of Rs14,318.4 billion comprising external public debt of $48.13 billion (Rs.4,796.5 billion) and domestic public debt of Rs9,521.9 billion. During the period starting from July 2013 to December 2015, the total public debt has grown to Rs18,467.3 billion out of which external public debt is $53.36 billion (Rs.5,589.2 billion) while domestic public debt is Rs12,878.1 billion. Thus, there is a net increase of Rs4,148.9 billion in total public debt, inclusive of $5.23 billion of external debt.
The reason our government was able to achieve a lower level of borrowing was that we kept the fiscal deficit under control by enforcing fiscal discipline. In this context, efforts have been made to achieve lower targets of fiscal deficits in the first three fiscal years of our government.
The previous government entered into a front-loaded Stand-By Arrangement with the IMF in 2008 with a total loan of $11 billion. A major chunk of the loan amounting to $3,089 million was released upfront, followed by four more releases amounting to $4,366 million, thereby making total loan disbursements of $7,455 million to the previous government. Thereafter, the Stand-By Arrangement was suspended due to the then government’s inability to implement the agreed economic reforms and as a result it could not draw the $3,545million earmarked for the country under the programme.
The present government entered into an Extended Fund Facility (EFF) with the IMF in September 2013 with estimated total amount of $6.6billion. Till date the inflows from IMF under the current programme has been $5,271 million while the repayments to the IMF in this period amount to $4,415 million, in settlement of the installments due of the loans taken by the previous government. Therefore, the net inflow from the IMF in our tenure stands at $856 million, which is included in the increase of $5.23 billion recorded in external debt. The government has successfully completed 10 quarterly reviews and is on track to complete the reforms programme by September 2016. The economic reforms being implemented are home-grown and were part of the manifesto of the PML-N and the became basis of the current IMF programme.
There were two reasons for entering into IMF-supported EFF. Firstly, the necessity of major repayment of loan taken by the previous government under the Stand-By Facility and secondly, to restart full-scale business with other multilateral development partners which had suspended support to Pakistan due to the macroeconomic instability caused by discontinuation of the reforms programme in the previous government’s tenure.
The present government has repaid over $10 billion of external debt till the end of December 2015, which mainly related to the borrowings of the previous governments. Despite this heavy repayment, the country’s foreign exchange reserves have risen to more than $20 billion, of which SBP reserves were$15.8 billion at the end of December 2015, which is equal to nearly four months of import cover as compared to less than around three weeks of import-cover in February 2014 when the SBP reserves stood at $2.8 billion.
It is worth mentioning here that while the external public debt has gone up by $5.23 billion during the two and a half years, the forex reserves of SBP have increased by $9.8 billion in the same period or by $13 billion when compared to from February 2014 to December 2015.
The critical consideration in debt management is the sustainability analyses for which various indicators have been designed. Major debt sustainability indicators have improved in the first two fiscal years.
1) The refinancing risk of the domestic debt portfolio was reduced through lengthening of the maturity profile at the end of June 2015. The percentage of domestic debt maturing in one year was reduced to 47 percent compared with 64 percent at the end of June 2013.
2) Exposure to interest rate risk was also reduced, as the percentage of debt re-fixing in one year decreased to 40 percent at the end of June 2015 compared to 52 percent at the end of June 2013.
3) Share of external loans maturing within one year is equal to around 28 percent of official liquid reserves at the end of June 2015 as compared with around 69 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
Moreover, there is a perception that the major part of forex reserves accumulation has been done by way of contracting expensive external debt, especially through Eurobonds, which again is a patently flawed understanding of the facts. The cost of Eurobonds issued by the government ranges from 7.25% to 8.25%. Pakistan re-entered the international capital market in April 2014 after a gap of seven years to seek additional funding on the basis of its improved macroeconomic indicators in order to avert the predicted June 2014 default of the country. Furthermore, a successful capital market transaction helps in opening other vistas for seeking foreign funding and foreign direct investment.
Furthermore, a large portion of the forex loans was contracted at extremely low rates and attractive terms. This is evident from the average cost of the total external debt obtained by the government till December 2015, which comes to around 3.3 percent. After including the grants mobilised by the government, the average cost of borrowing further reduces to 3.03%, which is significantly lower than the domestic financing cost of about 10 percent even after one builds a margin of capital loss due to exchange rate depreciation. Thus the cost of the external debt contracted by the government is not only economical but is also dominated by long-term funding. To establish the fact that this government has slowed down the pace of debt accumulation, the declining trajectory of the debt-to-GDP ratio is a sufficient proof.
It is worthwhile mentioning here that some quarters are quoting an incorrect number of external public debt. There is a need to understand the difference between external public debt and total external debt and liabilities of the country. External public debt stood at $53.4 billion at the end of December 2015 while at the same time the total external debt and liabilities were $68.5 billion. Total external debt and liabilities include debt of other sectors which by definition are not considered as public external debt since the government is not liable to pay these obligations. It includes debt of the private sector and banks etc.
A misconception commonly spread is that the CPEC will result in increase in public external debt to $90 billion by 2018. This is neither based on facts nor on a proper understanding of debt dynamics. First, a wrong base number of $66 billion is being used to arrive at the $90 billion number. Secondly, out of the total CPEC package of $46 billion, a major share of $35 billion is in the private sector, mostly in power generation in IPP mode, not adding to the external public debt.
Those making such astounding claims seem to lose sight of the fact that while making debt projections, the debt due for repayment during the corresponding period is to be taken into account as well. While new debt is contracted, previously accumulated liabilities are being discharged at the same time.
Another baseless and misleading news was recently run by Bloomberg that Pakistan’s external debt of nearly $50 billion was maturing during 2016. This was an outlandish speculation. Our total external debt is close to this amount and is due to be retired in the next 40 years. The finance ministry issued two detailed rejoinders, which were suitably addressed by Bloomberg.
At a time when we have brought major improvements in debt management it is regretful that some quarters are deliberately sowing seeds of doubt. Pakistan has regained its external reputation and financial credibility. This has been unquestionably recognised by international development partners and a number of well-reputed global publications.
Pakistan’s economy is showing visible signs of improvement. Having successfully averted the predicted default of June 2014 and having achieved macroeconomic stability, the government is now making efforts to put the economy on a high growth trajectory with a target of 7% by 2018 that would enable significant reduction in poverty and creation of jobs for our youth. The government is determined to consolidate the economic gains achieved so far and to ensure that these translate into increased economic opportunities for citizens.
Published in The Express Tribune, March 19th, 2016.
In early 2013, it had been predicted that Pakistan might default on its sovereign obligations if necessary steps to avert the situation were not taken. These predictions were made by financial experts, who had analysed the macroeconomic situation prevalent at that time and reached the conclusion that the country would not have sufficient external resources to meet its obligations of external debt beyond February-June 2014. There was a dire need for stemming the depleting reserves and stabilising a fast-depreciating currency, which touched Rs110.25 against the dollar on November 29, 2013, and which was fuelling inflation and raising the cost of debt servicing. The importance of lengthening the maturity profile of domestic debt became inevitable while maintaining interest rate stability and regaining growth momentum.
On assuming office, the present government took necessary steps for avoiding default, ensuring fiscal discipline and consolidation, stabilising a collapsing economy and accelerating growth. The government started revamping the economy through structural reforms and stabilisation measures such as reduction in un-targeted subsidies, broadening the tax base, restructuring public sector enterprises, building foreign exchange reserves and reducing the fiscal deficit, while ensuring that the social safety net and development spending are not only protected but enhanced considerably. A brief account of the improvement in major economic indicators over the period from June 2013 to June 2015 is given below:
1) FBR revenue increased from Rs1,946 billion in FY2012-13 to Rs2,588 billion in FY2014-15. The FBR is on course to achieve the revenue collection target in excess of Rs3,000 billion during FY2015-16.
2) The budget deficit was contained at 8.2% in FY2012-13 (down from a projected 8.8%) within weeks of assuming office. The deficit has been reduced to 5.3% in FY 2014-15. We are on track so far to reduce it to 4.3% for the FY2016.
3) Average inflation reduced from 8.62% in FY2013-14 to 4.53% in FY2014-15. Average CPI during the period July-February of FY2016 has been recorded at 2.48%.
4) Credit to the private sector, which was negative at Rs19.2 billion in FY2012-13, increased to Rs.208.7 billion in FY2014-15. During the current financial year, the amount has increased to Rs299.7 billion till February 12, 2016.
5) Credit to the agriculture sector increased from Rs336.2 billion in FY2012-13 to Rs515.9billion in FY2014-15. The target for the current FY2015-16 is Rs600 billion.
6) Development spending, which was Rs348 billion in FY2012-13, increased to Rs502 billion in FY2014-15. During FY2015-16, an amount of Rs700 billion has been budgeted.
7) Remittances increased from $13.9 billion in FY2012-13 to $18.7 billion in FY2014-15. During the current fiscal year, $12.7 billion were remitted till February 29, 2016.
The fiscal consolidation paved the way for a reduction in the debt-to-GDP ratio, which fell from 64% in FY2012-13 to 63.5% at the end of FY2014-15. In the next three fiscal years, our target is to bring down the debt-to-GDP ratio to 60% or less in accordance with the provisions of the Fiscal Responsibility and Debt Limitation Act (FRDLA), through effective debt management. Our government's vision is to further reduce the statutory debt limit from the existing 60% to 50% in 15 years, starting from FY2018-19 and to limit statutorily the federal fiscal deficit to 4% through introduction in parliament of an amendment bill for necessary changes in the FRDLA.
Despite these achievements, many detractors of the government are ceaselessly creating doubts about the country’s debt situation. There is, therefore, a need to set the record straight. Pakistan’s total public debt as of June 30, 1999 was Rs2,946 billion of which domestic public debt was Rs1,389 billion and external debt was Rs1,557 billion. Total public debt as of March 31, 2008 was Rs5,800 billion, which included domestic public debt of Rs3,020 billion and external debt of Rs2,780 billion. Public debt further increased to Rs14,318 billion by the end of FY2012-13, thereby the previous government contracted a net debt of Rs8,518 billion during its term 2008-13.
Pakistan runs a persistent fiscal deficit. For FY2012-13, its fiscal deficit was projected at 8.8% of GDP. It was due to a major effort during the last month of the FY2012-13 that we were able to contain it at 8.2%. Such a high level of fiscal deficit is unsustainable as it adversely affects economic growth and necessitates larger amount of borrowing to meet the fiscal gap.
The government started its first fiscal year in 2013 with inherited total public debt of Rs14,318.4 billion comprising external public debt of $48.13 billion (Rs.4,796.5 billion) and domestic public debt of Rs9,521.9 billion. During the period starting from July 2013 to December 2015, the total public debt has grown to Rs18,467.3 billion out of which external public debt is $53.36 billion (Rs.5,589.2 billion) while domestic public debt is Rs12,878.1 billion. Thus, there is a net increase of Rs4,148.9 billion in total public debt, inclusive of $5.23 billion of external debt.
The reason our government was able to achieve a lower level of borrowing was that we kept the fiscal deficit under control by enforcing fiscal discipline. In this context, efforts have been made to achieve lower targets of fiscal deficits in the first three fiscal years of our government.
The previous government entered into a front-loaded Stand-By Arrangement with the IMF in 2008 with a total loan of $11 billion. A major chunk of the loan amounting to $3,089 million was released upfront, followed by four more releases amounting to $4,366 million, thereby making total loan disbursements of $7,455 million to the previous government. Thereafter, the Stand-By Arrangement was suspended due to the then government’s inability to implement the agreed economic reforms and as a result it could not draw the $3,545million earmarked for the country under the programme.
The present government entered into an Extended Fund Facility (EFF) with the IMF in September 2013 with estimated total amount of $6.6billion. Till date the inflows from IMF under the current programme has been $5,271 million while the repayments to the IMF in this period amount to $4,415 million, in settlement of the installments due of the loans taken by the previous government. Therefore, the net inflow from the IMF in our tenure stands at $856 million, which is included in the increase of $5.23 billion recorded in external debt. The government has successfully completed 10 quarterly reviews and is on track to complete the reforms programme by September 2016. The economic reforms being implemented are home-grown and were part of the manifesto of the PML-N and the became basis of the current IMF programme.
There were two reasons for entering into IMF-supported EFF. Firstly, the necessity of major repayment of loan taken by the previous government under the Stand-By Facility and secondly, to restart full-scale business with other multilateral development partners which had suspended support to Pakistan due to the macroeconomic instability caused by discontinuation of the reforms programme in the previous government’s tenure.
The present government has repaid over $10 billion of external debt till the end of December 2015, which mainly related to the borrowings of the previous governments. Despite this heavy repayment, the country’s foreign exchange reserves have risen to more than $20 billion, of which SBP reserves were$15.8 billion at the end of December 2015, which is equal to nearly four months of import cover as compared to less than around three weeks of import-cover in February 2014 when the SBP reserves stood at $2.8 billion.
It is worth mentioning here that while the external public debt has gone up by $5.23 billion during the two and a half years, the forex reserves of SBP have increased by $9.8 billion in the same period or by $13 billion when compared to from February 2014 to December 2015.
The critical consideration in debt management is the sustainability analyses for which various indicators have been designed. Major debt sustainability indicators have improved in the first two fiscal years.
1) The refinancing risk of the domestic debt portfolio was reduced through lengthening of the maturity profile at the end of June 2015. The percentage of domestic debt maturing in one year was reduced to 47 percent compared with 64 percent at the end of June 2013.
2) Exposure to interest rate risk was also reduced, as the percentage of debt re-fixing in one year decreased to 40 percent at the end of June 2015 compared to 52 percent at the end of June 2013.
3) Share of external loans maturing within one year is equal to around 28 percent of official liquid reserves at the end of June 2015 as compared with around 69 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
Moreover, there is a perception that the major part of forex reserves accumulation has been done by way of contracting expensive external debt, especially through Eurobonds, which again is a patently flawed understanding of the facts. The cost of Eurobonds issued by the government ranges from 7.25% to 8.25%. Pakistan re-entered the international capital market in April 2014 after a gap of seven years to seek additional funding on the basis of its improved macroeconomic indicators in order to avert the predicted June 2014 default of the country. Furthermore, a successful capital market transaction helps in opening other vistas for seeking foreign funding and foreign direct investment.
Furthermore, a large portion of the forex loans was contracted at extremely low rates and attractive terms. This is evident from the average cost of the total external debt obtained by the government till December 2015, which comes to around 3.3 percent. After including the grants mobilised by the government, the average cost of borrowing further reduces to 3.03%, which is significantly lower than the domestic financing cost of about 10 percent even after one builds a margin of capital loss due to exchange rate depreciation. Thus the cost of the external debt contracted by the government is not only economical but is also dominated by long-term funding. To establish the fact that this government has slowed down the pace of debt accumulation, the declining trajectory of the debt-to-GDP ratio is a sufficient proof.
It is worthwhile mentioning here that some quarters are quoting an incorrect number of external public debt. There is a need to understand the difference between external public debt and total external debt and liabilities of the country. External public debt stood at $53.4 billion at the end of December 2015 while at the same time the total external debt and liabilities were $68.5 billion. Total external debt and liabilities include debt of other sectors which by definition are not considered as public external debt since the government is not liable to pay these obligations. It includes debt of the private sector and banks etc.
A misconception commonly spread is that the CPEC will result in increase in public external debt to $90 billion by 2018. This is neither based on facts nor on a proper understanding of debt dynamics. First, a wrong base number of $66 billion is being used to arrive at the $90 billion number. Secondly, out of the total CPEC package of $46 billion, a major share of $35 billion is in the private sector, mostly in power generation in IPP mode, not adding to the external public debt.
Those making such astounding claims seem to lose sight of the fact that while making debt projections, the debt due for repayment during the corresponding period is to be taken into account as well. While new debt is contracted, previously accumulated liabilities are being discharged at the same time.
Another baseless and misleading news was recently run by Bloomberg that Pakistan’s external debt of nearly $50 billion was maturing during 2016. This was an outlandish speculation. Our total external debt is close to this amount and is due to be retired in the next 40 years. The finance ministry issued two detailed rejoinders, which were suitably addressed by Bloomberg.
At a time when we have brought major improvements in debt management it is regretful that some quarters are deliberately sowing seeds of doubt. Pakistan has regained its external reputation and financial credibility. This has been unquestionably recognised by international development partners and a number of well-reputed global publications.
Pakistan’s economy is showing visible signs of improvement. Having successfully averted the predicted default of June 2014 and having achieved macroeconomic stability, the government is now making efforts to put the economy on a high growth trajectory with a target of 7% by 2018 that would enable significant reduction in poverty and creation of jobs for our youth. The government is determined to consolidate the economic gains achieved so far and to ensure that these translate into increased economic opportunities for citizens.
Published in The Express Tribune, March 19th, 2016.