Pakistan’s debt: putting the record straight

Economic indicators are always open to interpretation and debate. Some analyse these numbers objectively whereas others fall prey to their biases. In the latter case, analysts gather and present only selective information and analyse it on the basis of their preconceived notions. Unfortunately, few analysts in Pakistan are also not immune from such biases. What they do not realise is that by misinterpreting the facts and figures of extremely important indicators, they are doing a disservice to the country. They fail to realise that their analysis based on selective data may dampen confidence of both the domestic investors as well as external partners. Fortunately, international organisations including the World Bank, the IMF and the Asian Development Bank (ADB) as well as credit rating agencies, have proved to be objective in their analyses and assessments.

The case in point is the public debt management. Some inherently skeptical analysts have gone overboard with predictions of doomsday scenario for Pakistan’s debt and liabilities. Not surprisingly, their analyses are largely built on misinterpretations rather than facts. It must be understood that the contours of public debt management are complex. This process involves dealing not only with budgetary requirements of the country but also maintaining a fine balance between cost and risk, developing an efficient and deep secondary debt market, and maintaining the public debt at a fundamentally sustainable level.

Debt management has taken special emphasis in our public financial management. This is so because persistently large fiscal deficits of previous successive governments have caused a significant growth in the volume of public debt over the past few years. The vision of our government is not just to bring the debt-to-GDP ratio in line with existing statutory limit of 60 per cent, but also to scale down this limit to 50 per cent in 15 years, starting from FY 2018-19. Side by side, we have also put statutory upper limit of 4 per cent on federal fiscal deficit. Necessary amendments to the Fiscal Responsibility and Debt Limitation Act (FRDLA) in this regard have been passed in June 2016 by Parliament. Such far-reaching measures are going to bring further structured discipline in our debt management. As for now, let me present below a few points to address common misperceptions.

At the outset, there is a need to have a clear distinction between domestic and external components of public debt, since each category carries a different risk profile. As at end June 2016, the country’s gross public debt was Rs19.68 trillion and net public debt stock was Rs17.83 trillion, of which the net domestic component was Rs11.78 trillion and the external component was Rs6.05 trillion. Thus, net domestic debt constituted around 66% of net public debt, while the remaining 34% was external debt.

The government is adhering to the Medium Term Debt Management Strategy (MTDS) for the period 2015/16 — 2018/19 to make public debt portfolio more sustainable. As per MTDS, the government is focusing on extending the average time to maturity of domestic debt through mobilisation mainly in the form of medium to longer tenor instruments like Pakistan Investment Bonds (PIBs). Medium to long-term debt, which consists of permanent and unfunded debt, amounted to Rs8.6 trillion as at end June 2016, witnessing growth of 13.7% year-on-year. In contrast, the short-term debt, which composed of primarily treasury bills, increased by only 8.4% year-on-year.

Refinancing risk was one of the most significant issues in Pakistan’s public debt portfolio, driven primarily by the concentration of domestic debt in short maturities at the end of June 2013. An important aspect of having more domestic debt is that it inherently has a low intensity of roll-over risk compared to the external debt. Specifically, the debt denominated in local currency can be readily refinanced with an appropriate mix of treasury bills and investment bonds. The fortnightly auction of T-bills and monthly auction of PIBs of various maturities provides a well-functioning and systematic avenue to facilitate refinancing.

Here, it is also important to highlight that the entire amount of debt does not mature on the same day. Rather, it becomes due over a period of time which enables the government to plan its schedule of repaying or rolling over existing debt and go for a new period which is decided taking into account the prevailing cost of borrowing, prospects of rate for coming periods and matching it with tax collection pattern. Some analysts are often misquoting the level of public external debt in the media as US$ 73 billion. They lump together public debt with private debt, which includes foreign exchange borrowings of banks as well as the non-financial private sector. This represents a cumulative annual growth rate of only 6.3 per cent per annum. Certainly, this cannot be termed an exponential growth, as claimed by a few. It may also be noted that a part of this increase has come from the IMF debt, which has been taken only for balance-of-payment support, repayment of pending installments due to IMF of loan taken by the previous government in July 2011 and not for budgetary financing. Furthermore, the present government has repaid around US$ 12 billion of external debt till end June 2016, which was mainly related to the borrowings of the previous governments. Despite these heavy repayments, the forex reserves of the country have risen to more than US$ 23 billion, of which SBP reserves were US$ 18.1 billion at end June 2016, which is equal to over five months of import cover as compared to around one month of import cover in June 2013 when the SBP reserves (net of temporary swap of US$ 2 billion) stood at US$ 4 billion. At the time, some analysts were predicting that Pakistan would not have sufficient external resources to fulfil its external debt obligations and would head towards default by June 2014.

Published in The Express Tribune, February 1^st, 2017.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.