ISLAMABAD: The share of short-term public debt in total domestic debt has spiked to 44.2% or Rs6.6 trillion by the end of June, increasing rollover and re-financing risks for Pakistan.
The development comes as commercial banks discourage the federal government from seeking long-term loans due to uncertain economic conditions in the future.
The government’s overall domestic debt has consequently swelled to Rs14.9 trillion, up 9% Rs1.24 trillion compared to the preceding fiscal year, according to latest data released by the State Bank of Pakistan (SBP). The data revealed that the maturity period of total domestic debt has also shortened, putting the government under added pressure.
At the end of fiscal year 2016-17, the short-term domestic debt increased by 31% or Rs1.6 trillion within a single year. The short-term debt was only 36.7% or Rs5.1 trillion in the previous fiscal year.
When the PML-N government took office in 2013, the country’s short-term debt was 54.6% of the total domestic debt, which came down significantly during the first three years of its tenure.
However, almost the entire increase in short-term debt is on account of Market Treasury Bills (MTBs) issued to replenish cash flows and reserves. The federal government’s total borrowings through MTBs increased to Rs4.1 trillion or 27.5% of the domestic debt, reflecting a net addition of Rs1.3 trillion in MTBs at 47.3%.
Similarly, the MTBs issued for replenishment of cash also increased to Rs2.5 trillion – a net addition of Rs452 billion in one year.
Pakistan’s total debt and liabilities have increased to an alarming level of Rs25.1 trillion by June this year. In terms of the total size of the economy, the country’s debt and liabilities increased to 78.7% of the gross domestic product (GDP), which is beyond an acceptable and ‘safe’ benchmark for developing countries like Pakistan.
Out of Rs25.1 trillion, the gross public debt, which is the responsibility of the government directly or indirectly, was Rs21.4 trillion, according to the SBP data.
The change in the composition of domestic debt suggests that the government could not fully implement its second Medium Term Debt Management Strategy 2016-2019 aimed at lengthening the maturity profile to reduce refinancing risk.
One of the main objectives of the medium term strategy is “gradually lengthening the maturity profile of domestic debt by mobilising more financing in the form of medium and longer tenor instruments to reduce the rollover refinancing risk”.
“If the government finally decides to devalue the rupee in coming weeks, the SBP may have to review its discount rate policy that in return will expose the government to refinancing risks,” said J S Global Capital Chief Commercial Officer Khurram Schehzad. He said that the banks are also not ready to take long-term exposure due to uncertainties on the political front.
Due to low interest rate environment, short-term loans are relatively cheaper than long term-debt but it carries huge refinancing risks. The government’s average borrowing cost through MTBs is slightly over 6% as against 6.4% to 7.93% for three-year to ten-year Pakistan Investment Bonds (PIBs).
However, the average of three-year to ten-years PIBs increased between 0.32% to 0.61% during the PIBs auction on September 20, indicating that the banks are not willing to invest in long-term papers.
A weakened debt office
The Debt Policy Coordination Office, which directly reports to the finance minister, could not be fully strengthened during the past four years. Director General of Debt’s contract has expired and he is working on extensions. Few critical posts of specialists still remain vacant, although some were filled couple of months back.
The debt office also does not have a role in operational matters and its job is largely limited to analysing data once the debt is contracted.
The country’s long-term debt, with a maturity period of over one year to 10 years, decreased from Rs8.62 trillion to Rs8.3 trillion, showing a reduction of Rs326 billion by the end of June. The share of long-term debt was 63.6% in the total domestic debt at the end of June 2016. It decreased to 55.6% of the total domestic debt by June this year.
The share of federal government issued bonds decreased from Rs5.2 trillion to Rs4.8 trillion despite overall increase in the public debt.
Published in The Express Tribune, September 24th, 2017.