Public debt indicators deteriorate
The Ministry of Finance said that Rs3.8 trillion of increase in public debt was due to currency depreciation. photo: file
Pakistan’s external debt sustainability indicators further worsened in the last fiscal year due to more reliance on short-term foreign loans, exposing the government to risks related to refinancing and rupee depreciation, reveals a new report of the Ministry of Finance.
On the domestic front, the finance ministry also seemed helpless in front of commercial banks that invested more in floating interest rate instruments while also preferably offering short-term debt, according to the fiscal year 2021-22 debt report.
The Pakistan Tehreek-e-Insaf (PTI) remained in power in the first nine months of previous fiscal year. The Ministry of Finance has made the Annual Debt Review and Public Debt Bulletin for fiscal year 2021-22 public.
The report showed deterioration in public debt indicators pertaining to debt maturity, currency risks, refinancing risks and interest rate risks. The report reflects poorly on the performance of the Public Debt Management Office and the federal government.
Total public debt jumped from Rs39.9 trillion to Rs49.2 trillion within a year, an unsustainable increase of Rs9.3 trillion. But the Ministry of Finance said that the Rs3.8 trillion worth of increase was due to currency depreciation as the exchange rate slipped from Rs157.3 to a dollar in June 2021 to Rs204.4 in June 2022. The rest of the increase was due to budget financing needs.
The share of external debt in the total public debt increased from 34% in 2020-21 to 37% in the last fiscal year, according to the report. It was heading towards the maximum limit of 40%. The finance ministry said that the increase was mainly attributable to the exchange rate depreciation rather than excessive external borrowing.
The external debt is obtained from three major sources, with around 48% coming through multilateral loans, 30% via bilateral loans and 22% from commercial banks and sovereign bonds.
“High levels of external debt can pose severe challenges in times of high current account deficit, low foreign exchange reserves, and fragile exchange rate,” admitted the ministry in the report.
It added that large external payments in the wake of low foreign exchange reserves could create liquidity problems and even destabilise the exchange rate which, in turn, could increase the burden of external loans measured in local currency. According to the report, the average time-to-maturity (ATM) of the external debt dropped from 6 years and 8 months in 2020-21 to just 6 years and two months in 2021-22. It also stood below the target of 7 years and the benchmark of 6.5 years.
Within the external public debt, the share of short-term debt increased from $14.3 billion to $21.4 billion in a year – one of the key reasons for the high gross external financing requirement of $40 billion for the current fiscal year. Similarly, the bilateral deposits by foreign countries jumped from $4 billion to $7 billion.
This has massively increased the refinancing risks, which will compromise the country’s economic sovereignty. The finance ministry stressed that the decline in ATM of the external debt needed to be carefully analysed and addressed.
In recent years, the government has borrowed significant amounts from commercial sources including medium to long-term Eurobonds, and short-term bank loans. Eurobonds are mostly of five- and 10-year tenors whereas bank loans typically have maturity of one year. Most of the bilateral loans obtained in recent years also have relatively shorter maturities.
A combination of the above factors has resulted in lower ATM of the external debt, it added.
The average time-to-maturity (ATM) of the domestic debt remained the same as that in previous year at 3.6 years and below the target of 4 years. The finance ministry admitted that the high levels of short-term public debt could pose severe refinancing challenges during times of slower economic growth, higher fiscal deficits, and lower investor confidence –the three factors that are already present in Pakistan’s case.
Gross financing needs (GFN) have dropped in terms of the size of economy but they are not consistent with the growing short-term debt. The ministry said that the GFN-to-GDP ratio dipped further during 2021-22 and stood at 26%.
“A lower GFN-GDP ratio in 2021-22 is attributable partly to an upward revision in GDP as a result of rebasing of GDP figures and partly to the consistent and successful efforts made by MoF to contain borrowing through short-term T-bills.”
Published in The Express Tribune, October 2nd, 2022.
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