The share of foreign currency debt further increased to 36% of the total debt in the last fiscal year, which exposed the government to exchange rate risks, says a new annual debt review report of the Ministry of Finance.
The annual Debt Review & Debt Bulletin for fiscal year 2019-20, released on Thursday, showed either deterioration in indicators or they remained unchanged. But these did not breach the maximum limit set in the medium-term debt management strategy 2019-23.
The share of external debt in the total public debt increased and the average maturity time for domestic debt slightly worsened. The average time of maturity for external debt remained unchanged at seven years compared with the preceding year.
“Around 36% of the total public debt was denominated in foreign currencies at end-June 2020, exposing the government to exchange rate risk,” according to the finance ministry report.
Since the Pakistan Tehreek-e-Insaf (PTI) government came to power, Pakistani rupee devalued by 39%, which caused a steep rise in public debt. If the value of rupee falls further, Pakistan’s debt burden will jump due to increased exposure to foreign loans.
As against the last medium-term debt management strategy that expired a year ago where the maximum limit for external debt had been fixed at 35%, the PTI government relaxed the ceiling to 40% in the new debt management strategy.
This is an indication that the government does not see any improvement in exports, foreign direct investment and remittances, which could lessen Pakistan’s reliance on external debt.
At the end of the PML-N tenure, the share of external public debt in the total public debt was 32.2%, which has now deteriorated to 36% within two years. In 2018-19 - the first year of the PTI government - the ratio was 34.8%, showed the finance ministry report.
The annual debt report has carried detailed information related to developments in public debt and government-guaranteed debt portfolio, debt service payments; composition and structure of debt; key debt risk indicators; and developments in the domestic debt market during FY 2019-20.
The report maintained that the government remained within stated benchmarks of risk indicators during FY 2019-20. But a majority of these indicators were moving towards the red and it needs a compressive policy to enhance revenues and non-debt creating inflows for correcting these imbalances.
The report showed that the average time of maturity for domestic debt was 4.1 years in the last fiscal year, compared with 4.2 years in 2018-19. In the strategy document, the minimum threshold was four years.
The average time of maturity for external debt was seven years in the last fiscal year while the minimum limit was set at six years and five months.
Gross financing needs remained at 31% of gross domestic product (GDP) in the last fiscal year against the maximum limit of 35% set in the policy. The report showed that about half of the government’s public debt would mature within three years. This includes 36% of domestic debt and 13% of external debt.
The finance ministry said domestic borrowing was made entirely from financial markets. No borrowing was made from the State Bank of Pakistan (SBP). This policy reflects the government’s commitment to greater fiscal discipline, macroeconomic stability and development of domestic financial markets.
More than 90% of the borrowing needed to finance the fiscal deficit in FY 2019-20 was made through longer-term loans and bonds. Also, with effect from July 1, 2020, all institutional investors have been barred from investing in saving schemes.
Sovereign guarantees
The government issued Rs342 billion worth of new guarantees or rolled over existing ones in favour of loss-making public sector enterprises (PSEs). This took the volume of total outstanding guarantees to Rs2.34 trillion, an addition of 18.8% within one year.
The government was required to restrict the stock of outstanding guarantees to Rs1.6 trillion under the International Monetary Fund (IMF) agreement.
About Rs271 billion worth of guarantees were rolled over in favour of Pakistan Holding Private Limited, which showed that the government once again failed to address the issue of circular debt.
The finance ministry also gave Rs33 billion worth of sovereign guarantees for PIA, Rs20 billion for Pakistan Atomic Energy Commission and Rs18 billion for the Water and Power Development Authority.
The volume of new government guarantees issued during a financial year is limited under the Fiscal Responsibility and Debt Limitation Act, to 2% of GDP.
Overall, the total public debt was recorded at Rs36.4 trillion at the end of June 2020, recording an increase of Rs3.7 trillion during FY 2019-20.
Total public debt-to-GDP ratio increased from 86.1% in June 2019 to 87.2% in June 2020. But it was far less than the increase in first year of the PTI government when the ratio jumped from 72.5% to 86.1%.
Published in The Express Tribune, October 2nd, 2020.
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