Debt indicators paint bleak picture

Increase in short-term debt has heightened foreign currency risk

ISLAMABAD: Pakistan’s debt sustainability indicators have significantly worsened in the past one year due to increase in foreign exchange and refinancing risks, which appears to be the result of reckless borrowing, showed an official report.

The average time to maturity of public debt fell in fiscal year 2015-16, which increased the refinancing risks, according to the Public Debt Management Risk Report that the Ministry of Finance released on Thursday.



Similarly, short-term foreign currency debt as a percentage of official liquid reserves and net international reserves increased in fiscal year 2015-16, which increased the foreign currency risk, revealed the report.

It suggested that most of the indicators were moving into the red, although these were still within the limits prescribed in the Medium Term Debt Management Strategy 2016-19.

The debt management strategy that Pakistan adopted in March 2016 under an IMF programme has set target ranges for currency, refinancing and interest rate risks.

The average time to maturity of the public debt has come down from four years and three months in 2015 to four years and one month, according to the report prepared by the Debt Management Office of the finance ministry.

The major reduction was on account of decrease in the average time to maturity of external debt from nine years and four months to eight years and nine months. This appeared to be the result of government’s decision to resort to short-term foreign commercial borrowings.

The domestic debt’s average time to maturity also reduced from two years and three months to two years and one month, according to the report.



These changes appear contrary to the target set in the medium term strategy that talks about increasing the average time to maturity of the domestic debt.

The average time to refixing of public debt has also dropped from four years and one month to three years and eight months, heightening the interest rate risk. The external debt’s average time to refixing also reduced from eight years and six months to eight years and two months.

The ratio of domestic debt maturing in one year increased from 47.3% to 51.9%. The ratio of external debt maturing within one year also increased from 8.1% to 11.3%.

Consequently, the ratio of debt - maturing within one year - as percentage of total public debt increased from 36.2% to 40.3%, according to the report.

Forex risks

The foreign currency debt as a percentage of total debt slightly increased from 28.3% to 28.6% by June 2016, according to the finance ministry’s report.

The ratio of short-term foreign currency debt as a percentage of net international reserves of the central bank worsened from 70.3% to 76.5% by June 2016. Similarly, the ratio of short-term foreign currency debt as percentage of total official liquid reserves deteriorated from 27.9% to 31.9%.

However, the fixed debt (debt issued at a fixed rate as opposed to the one pegged with Kibor) as a percentage of total public debt slightly improved from 65.8% to 67.6%, according to the report.



Pakistan’s external debt is projected to grow to a whopping $110 billion within four years and it will need over $22 billion a year just to meet external payment requirements, according to projections made by two renowned economists, former finance minister Dr Hafiz Pasha and former director general debt Dr Ashfaque Hasan Khan. This poses a serious threat to the country’s solvency, according to them.

During the past one year, the government’s contingent liabilities also significantly increased, which showed deterioration in public sector enterprises and more borrowings by these state-owned companies for various purposes.

The federal government’s contingent liabilities stood at Rs721.2 billion in June 2016, compared to Rs636 billion in fiscal year 2014-15, according to the report.

Published in The Express Tribune, November 18^th, 2016.

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