Govt reduces debt rollover risk
Pakistan has met the International Monetary Fund (IMF) condition of increasing the maturity profile of its debt through retiring the short-term borrowing and the government also hopes to strike a $1 billion foreign commercial loan deal in April.
The development came hot on the heels of some improvement in debt indicators, including the expected slowdown in the pace of debt accumulation to single digits after a long time. The debt office, which now directly reports to the finance secretary, has taken certain initiatives to reduce interest rate and debt refinancing risks.
Against the IMF's condition of increasing the current average maturity time of debt from two years and eight months, the Finance Division managed to increase it to three years and three months by December, according to data compiled for the IMF review starting from Monday.
The first formal programme review talks between Pakistan and the IMF will begin on March 3 and will continue till March 14. Their successful conclusion will lead to the release of the second loan tranche of about $1.1 billion.
Pakistan's performance in terms of debt maturity is much better than the end-June 2025 target set by the IMF. This has reduced both refinancing and interest rate risks and will also lessen the government's dependence on commercial banks.
The average time to maturity is the weighted average repayment period of the existing debt. The IMF has been pointing to increasing the maturity period to address the risk of rollover.
The maturity target has been achieved by shifting the composition of domestic debt, which stands at Rs49 trillion, to longer-term Pakistan Investment Bonds (PIBs) while reducing reliance on short-term treasury bills (T-bills), said Eraj Hashmi, Director of Debt Office.
He said that the deliberate move not only mitigated rollover risks but also attracted investors, who were seeking stable, long-term returns, reinforcing confidence in Pakistan's debt management strategy.
The finance ministry is also trying to secure a $1 billion foreign commercial loan on the back of a $500 million credit guarantee being given by the Asian Development Bank (ADB). Pakistan has not been able to get a new foreign commercial loan due to its poor rating. As a solution, it will use the ADB guarantee.
Sources said that London-based commercial banks had shown interest and the terms were being finalised. Among these are Standard Chartered and Deutsche Bank. One Chinese bank has also shown interest.
The government has also been trying to raise debt from Chinese markets but it is a lengthy process and now it hopes to raise up to $250 million by next year. Internal assessment shows that Panda Bonds will attract around 3.5% interest rate, which is far lower than up to 8.5% rates for issuing Eurobonds.
The Finance Division has managed to restrict debt accumulation to single digits, helped partially by the reduction in interest rate. In the last fiscal year, there was an increase of Rs8.4 trillion in the debt stock, showing a surge of 13.3%.
The Finance Division's assessment is that the debt accumulation will slow down to less than 9% in this fiscal year and the net increase will not be more than Rs6.3 trillion. It sees the public debt growing to Rs77.5 trillion by June this year.
During the first half of the current fiscal year, Rs2.8 trillion had been added to the debt stock at a pace of 3.9%.
The finance ministry said that it would continue implementing the debt buyback policy and next week it would buy back PIBs. Earlier, it had bought Rs1 trillion worth of T-bills, which resulted in savings of Rs31 billion in interest cost, according to the ministry.
This will continue in the second half of this fiscal year through buying back bonds instead of T-bills.
The ministry said that in the first six months of the current financial year, it retired Rs1.7 trillion worth of debt, reducing reliance on commercial banks. The reason was the upfront payment of Rs2.5 trillion in profit by the central bank.
As a result, the T-bills portfolio decreased Rs1.5 trillion, which will positively impact next year's gross financing needs.
In June last year, banks held 81% of government securities. Now, their holdings stood at 67%.
The finance ministry said that the government had contained external debt since Prime Minister Shehbaz Sharif took office in March last year. Total external debt remained stable at $86.6 billion during the period, showcasing effective debt management and reluctance to take unnecessary debt, it added.
The narrative of Pakistan's debt is no longer one of despair but of determination, discipline and decisive action, said Eraj Hashmi. Through strategic reforms, the government has slowed debt accumulation, he added.
The government also expects to save Rs1 trillion due to interest rate reduction. Against the allocation of Rs9.8 trillion, the cost may hover around Rs8.7 trillion. In the second half, the estimated interest payment is Rs3.6 trillion, said the finance ministry. During the first half, Rs5.1 trillion was spent on interest payment.
The ministry would on Monday undertake the first-ever buyback auction of government bonds. This strategy aligns with international best practices and demonstrates the government's capability to retire debt ahead of maturity.