Pakistan’s debt maturity profile shortens

Govt relies more on short-term loans, faces refinancing risks

ISLAMABAD:

Pakistan’s public debt maturity profile further shortened in the last fiscal year due to more reliance on short-term loans, exposing the government to refinancing risks in the middle of possibility of further increase in interest rates due to soaring inflation.

The Ministry of Finance on Friday released the Annual Debt Review and Public Debt Bulletin for fiscal year 2020-21. The report showed deterioration in public debt indicators related to maturity of the debt. But the indicator about currency risk improved due to a reduction in external debt share and overall debt-to-GDP ratio also reduced, although the country’s debt bearing capacity has weakened.

The report includes details on progress on Medium Term Debt Management Strategy (MTDS); developments in total public debt and government guarantees portfolio; changes in the composition and structure of domestic and external debt and debt service payments

The finance ministry stated that the average time to maturity of the domestic debt further reduced from four years and one month to just three and half years. The government’s target was to keep it at least at four years. The three-and-a-half year’s ratio was just a month above the minimum threshold of three years and five months set in the Medium Term Debt Management Strategy.

Similarly, the average time of maturity of the external debt also deteriorated from last year’s level of seven years to six years and eight months. The official target was to restrict it to at least seven years in the previous fiscal year.

Few annual targets set for 2020-21 with respect to debt risk indicators were slightly missed mainly due to higher than envisaged federal fiscal deficit; lower than planned issuance of Sukuks bonds due to unavailability of assets; net retirement in national saving schemes stock mainly due to encashment of prize bonds, said the finance ministry while giving reasons behind deterioration of the indicators.

The government remained within the stated benchmarks of risk indicators during fiscal year 2020-21, it added. The report has been prepared by the Debt Policy Coordination Office of the finance ministry.

The debt maturity has shortened at a time when the central bank has increased the interest rates while also signalling to further increase it in the coming months. The government may have to replace relatively cheaper loans with expensive ones besides remaining vulnerable to the exploitation by the creditors.

The report stated that nearly half of the domestic debt obtained through government securities has been held by the commercial banks - a ratio that was 40% in the preceding year. In absolute terms, the federal government owed Rs12.8 trillion to the commercial banks.

The report showed that nearly half of the total public debt was maturing within three years - a ratio that is 37% for domestic debt alone.

The share of fixed rate domestic debt had been reduced by 7% to 40% of the domestic debt at a time when the interest rates were low and the government should have opted for issuing long term papers at the fixed rates.

But the finance ministry said that nearly 73% of the total of borrowings from domestic sources was through medium to long term domestic debt. It stated that in-line with the government’s commitment; no new borrowing was made from the State Bank of Pakistan (SBP). The government repaid Rs569 billion during the year against its debt owed to SBP. The cumulative debt retirement against SBP debt stood over Rs1.1 trillion during the last two fiscal years.

External debt

Pakistan is availing the G-20 Debt Service Suspension Initiative (DSSI) for a period of 20- months (May 2020 - December 2021) which will help to defer the debt servicing to the tune of around $3.7 billion during this period, said the finance ministry.

Pakistan’s external debt is derived from four key sources, with around 48% coming from multilateral loans, 30% from bilateral loans, 13% from commercial loans and 9% from Eurobonds/Sukuk at the end June 2021.

Although borrowing from commercial sources has relatively increased during the last few years, multilateral and bilateral sources still cumulatively constitute 78% of external public debt portfolio as of end June 2021, said the finance ministry

The commercial loans that were $9 billion a year ago increased to $11.3 billion or 13% of the external public debt, which is highly risky.

In June 2020, the short-term external debt maturing within a year was $12.4 billion or 16%, which increased to $14.3 billion or 17% of external public debt, according to the report. The $14.3 billion also includes $9.4 billion that had been taken on longer terms but completed the terms in the last fiscal year.

Safe China deposit has increased to $4 billion - an increase of $1 billion during the last fiscal year.

There was a significant decline in the disbursements by the multilateral lenders which slipped from $8.3 billion a year earlier to $4.8 billion in the last fiscal year. This was replaced by short-term riskier debt.

Published in The Express Tribune, October 2^nd, 2021.

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