ISLAMABAD: The debt burden kept piling up at a rapid pace as the federal government’s domestic debt increased to Rs15.4 trillion by the end of July 2017 and half of it comprised short-term loans, according to the State Bank of Pakistan (SBP).
A net increase of Rs1.534 trillion was recorded in the domestic debt in the past one year, which was 11% higher than that in July 2016, showed provisional statistics the central bank released on Friday. The figures did not include external loans.
The double-digit growth in domestic debt is the result of deviation from the path of fiscal discipline and failure to adhere to the principles of prudent debt management after the end of International Monetary Fund’s programme in September last year.
In just one month, domestic debt rose Rs540 billion. It stood at Rs14.9 trillion in June this year and grew to Rs15.4 trillion by the close of July.
The statistics suggest the ongoing debate on the sky-high debt would not die down any time soon. The debt burden has triggered a national debate on sustainability of the country’s macroeconomic framework.
The share of short-term public debt increased alarmingly to 49.4% or Rs7.8 trillion by the end of July. At the same time last year, the short-term domestic debt stood at 44.4% or Rs6.2 trillion.
The short-term debt grew Rs1.44 trillion or 23.4% in one year, suggesting that the entire increase in the overall debt came from short-term loans. The rise in short-term debt was the result of growing dependence on borrowing through sale of Market Treasury Bills (MTBs).
The federal government’s total borrowing through MTBs increased to Rs4.4 trillion, up 41% or Rs1.3 trillion in one year.
Similarly, the MTBs issued to replenish cash rose to Rs3.2 trillion, a net addition of Rs364 billion in a year.
The mounting short-term debt suggests that banks were not willing to provide long-term loans in anticipation of increase in interest rates, according to analysts.
Another reason was that the federal government had started relying on the central bank for financing its deficit, which changed the debt structure in the past one year.
The Ministry of Finance does not agree that the country’s debt burden has crossed dangerous levels. Nonetheless, it changed the definition of public debt twice through the Finance Act in a bid to conceal the actual debt burden.
The change in the composition of domestic debt suggests that the government could not fully implement its second Medium Term Debt Management Strategy 2016-19 that is aimed at lengthening the maturity profile to reduce the refinancing risk.
When the PML-N government took office in mid-2013, the short-term debt comprised 54.6% of total domestic debt, which at one time fell to about 36% as a result of prudent debt management.
Owing to low interest rates, short-term loans are relatively cheaper than long-term debt but they carry huge refinancing risks. The government’s average borrowing cost through MTBs is slightly over 6% against 6.4% to 7.93% for three to ten-year Pakistan Investment Bonds (PIBs).
The country’s long-term debt, with maturity period of more than one year to 10 years, increased slightly to Rs7.8 trillion. Its share was 55.8% in the total domestic debt at the end of July 2016, which contracted to 50.6% by July this year.
The share of bonds issued by the federal government shrank from roughly Rs4 trillion to Rs3.8 trillion despite an overall increase in public debt. A net reduction of Rs103 billion or 25% in PIB holdings indicates that banks are not willing to lock funds for longer periods.
However, the debt acquired through the sale of prize bonds increased from Rs654.5 billion to Rs755.3 billion at the end of July 2017.
Published in The Express Tribune, October 21st, 2017.