Debt sustainability indicators head to dangerous threshold

Published: December 3, 2017


ISLAMABAD: Pakistan’s all debt sustainability indicators, except two, have weakened in the last fiscal year of the incumbent government while the average maturity period of the entire public debt stock has also shortened to just three years and eight months — even worse than the level in pre-PML-N era.

The revelations were made in a Public Debt Management Risk Report of June 2017 that the Ministry of Finance finally released at the weekend but only after the stakeholders put pressure on it to make the report public.

The report covers public debt of up to June 2017 when the federal government’s gross public debt was Rs21.4 trillion — a whopping 67.2% of the total national output.

Former finance minister Ishaq Dar has been severely criticised for throwing the country into a debt trap. However, the Finance Ministry has released a watered down version of the report because it has again deleted a critical indicator –“the short-term foreign currency debt as percentage of the Net International Reserves” (NIR).

The NIR is defined as a difference between the usable gross foreign currency reserves and the reserves related liabilities. The short-term foreign currency debt as percentage of the NIR was 76.5% in June 2016 but the latest figure has not been disclosed.

IMF calls for ‘regular’ assessment of public debt structure

It seems that the government does not want to disclose the NIR level, which has significantly worsened since the expiry of the International Monetary Fund (IMF) programme in September last year. In June 2016, when the State Bank’s gross official reserves were $18.2 billion, its net reserves were only $7.5 billion.

One of the signs of worsening net international reserves position is that the SBP contracted $4.5 billion short-term loans by June 2017. In September 2013, when Pakistan had signed the three-year programme with the IMF, the central bank’s net reserves were negative $4.5 billion.

The Finance Ministry has also not released the indicator of short-term foreign currency debt as percentage of NIR in its December 2016 debt report. At that time, it had stated that “after the conclusion of the IMF programme, the NIR data was not being compiled”.

The new report showed that most of the indicators were moving towards the dangerous thresholds, although those were still within the limits prescribed in the Medium Term Debt Management Strategy 2016-19.

The debt management strategy that Pakistan adopted under the IMF programme has set target ranges for foreign currency, refinancing and interest rate risks.


Refinancing risks

The average time-to-maturity of the public debt has come down from four years and one month in 2016 to just three years and eight months. This ratio was four-and-half-years when the PML-N government came into power.

The deterioration was on account of both domestic and external debts. The average time-to-maturity of external debt decreased by five months to eight years and four months.

This appeared to be the result of the government’s decision to resort to short-term foreign commercial borrowings. In 2013, when the PML-N government came into power, the maturity period of the external debt was 10 years and one month that has now shortened by almost one-and-half-years.

The domestic debt’s average time-to-maturity also reduced by three months to one year and eight months by the end of the last fiscal year, according to the report.

The results show that the government has deviated from the path of the prudent debt management.

“The guiding principle (of MTDS) was lengthening of the maturity profile of domestic debt while making appropriate trade-offs between cost and risks,” the Finance Ministry had said in November last year.

The indicator of debt maturing in one year has also deteriorated. In June 2016, the public debt maturing in one year was 40.3% of the total debt, which has now increased to 42.1%.

The entire deterioration was because of domestic debt, as the ratio of domestic debt maturing in one year increased from 51.9% to 55.6%. The ratio of external debt maturing within one year improved from 11.3% to 8%.


Interest rate risks

Another critical indicator — the average time to re-fixing of public debt — has also dropped by three months to three years and five months, heightening the interest rate risk.

The external debt’s average time to re-fixing also reduced from eight years and two months to seven years and five months. The domestic debt re-fixing reduced by one month to two years.

The average time to re-fixing is a measure of weighted average time until all the principal payments in the debt portfolio become subject to a new interest rate.

Govt sits on critical public debt report

Due to growing dependence of floating interest rate debts, the ratio of fixed rate public debt — debt issued at a fixed rate as opposed to the one pegged with Kibor –has come down from 67.6% in 2016 to 61.2% by June this year.

The external fixed rate debt came down from 82.6% to 77.7%. The domestic fixed rate date also reduced from 61.6% to 54.6%.

Similarly, the weighted average time of public debt — that has to be re-fixed in one year — has increased from 44.4% to 47.8%. The external debt that requires to be readjusted in one year to new interest rates increased from 23.4% to 26%. The ratio for domestic debt increased from 52.8% to 56.4%.

Forex risks

The foreign currency debt as a percentage of the total debt slightly decreased from 28.6% to 28.4% by June 2017, according to the report. This was also because the government had changed the public debt definition, excluding publically-guaranteed debt from its public debt.

Most of China’s debt, for instance $6.6 billion loan for the Karachi Nuclear Power Plants, is publically-guaranteed debt.

Contingent Liabilities

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

By June, the federal government’s contingent liabilities stood at Rs936.9 billion as against Rs721.2 billion in June 2016.

It also issued new sovereign guarantees equal to 1.9% of GDP in the last fiscal year of the government as against only 0.7% new guarantees issued in the preceding year.

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