The government’s failure to introduce reforms has halted the inflow of cheap foreign loans, due to which reliance on short-term debt has increased alarmingly.
According to the Debt Policy Statement 2012-13, submitted to parliament by the Ministry of Finance, the share of short-term debt with a maturity period of less than a year has increased to 54.2% of total domestic debt.
‘Maturity’ refers to the final date on which a loan becomes payable in entirety (the principal amount and interest payments).
The situation may generate a ‘confidence crisis’ in the near term because of investor fears that the government may not be able to meet its obligations due to the insufficient funds at its disposal.
The report highlights that the average maturity of domestic debt has come down to only 1.6 years – with Rs2.5 trillion of debt reaching maturity in less than a year – raising rollover and refinancing risks. Adding Rs1.7 trillion that the government owes to the central bank, 55.3% of the entire domestic debt stock will mature in less than a year.
Following the premature termination of a $11.3 billion bailout programme by the International Monetary Fund, the World Bank and the Asian Development Bank have also suspended annual lending programmes. These multilateral lending institutions are looking for a comprehensive reforms agenda before they restore $3-4 billion in annual funding.
Meanwhile, the government has had to shift almost the entire burden of budget financing to domestic sources.
“Owing to non-availability of sufficient external inflows, the financing focus shifted towards domestic sources, which led to shortening of [the] maturity profile of the public debt,” states the document.
“This avenue is costly. Debt structures that rely heavily on short-term instruments are sources of vulnerability and can potentially generate confidence crisis, fuelled by investor concerns that the government will not have sufficient funds to repay its obligations when they fall due,” the report adds.
During the last fiscal year, out of the Rs821 billion spent on domestic debt servicing, around Rs379.5 billion alone was spent on retiring short-term debts – over 46% of the total spending on domestic debt servicing.
Of that amount, Rs214.5 billion was paid to commercial banks in interest charges, while Rs165 billion was paid to the central bank. However, the interest paid to the central bank returns to the federal government as profits from the State Bank of Pakistan, according to former finance minister Dr Hafeez Pasha.
The paper states that due to the government’s increasing reliance on domestic borrowings, “an increase in interest rates has [had] an adverse fiscal impact” on the economy.
As the central bank is implementing a monetary easing policy, despite the government’s expansionary fiscal policy, the federal government has saved roughly Rs70 billion due to a reduction in interest rates.
Analysts warn of the implications of the expansionary fiscal policy and reckless borrowing from commercial banks at this critical juncture. They say that money borrowed to finance expenditures of a purely political nature will have severe implications for the economy, with signs appearing with a six-month lag in the shape of increased inflationary pressure.
The report underscores another important issue. It proposes that the debt piles be considered in terms of revenues and export earnings, as comparisons with the total size of the economy could be deceptive since many sectors like agriculture are exempt from taxation.
Going with that proposal, Pakistan’s public debt as a percentage of its revenues grew by 493.6% in the period reviewed, while the country consumed roughly 40% of its revenues for servicing such debts, according to the report.
An amount of Rs1.1 trillion was consumed on public debt servicing in the previous fiscal year. As of June last year, in terms of GDP, the debt amounted to 61.3% of the worth of all goods and services produced by the country.
The report seeks comprehensive debt management aimed at keeping the current levels of debt under control and fulfilling future payment obligations.
Published in The Express Tribune, February 6th, 2013.
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COMMENTS (17)
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Nothing legitimate about invalid contracts. @roadkashehzada:
Money explained: Financial 'ideas' that few understand! http://t.co/s7AL40s7
Domestic debt is always better than overseas debt provided it is taken according to the requirement of tenure and provided i repeat provided domestic borrowing do not cause liquidity crunch for the domestic demand. Any restraint on liquidity will cause to increase the cost of borrowing in the market with adverse effect on economical growth. borrowing limit (by the government) is prescribed based on the perceived ability to service the debt (considering the GDP growth and fiscal deficit) . higher spending on infrastructure and capital goods are indicators of growth ( expected) in GDP. Short term debt are surely a matter of concern if they are raised because of the inability of the govt to raise debt on long term basis at the most competitive pricing .Foreign debts are comparatively cheaper and available on long term basis ( may be with some conditions aimed as corrective measure to achieve sustained debt service ability.)
@gp65:
Wow! Amazing what a quick Google lesson can teach you. Thanks for sharing economic platitudes. Why don't you just focus on your Ph.D. dissertation according to which, the US social security system is SOLVENT.
Recover all multiple-million dollar properties that this govt officials have bought in London with stolen public funds. Debt will be paid in days
This is just one of may irresponsible deliberate mess ups by this government ..............the list of of other deliberate and non-deliberate (inept) mess ups, is just too long to itemise.
What role does the Central Bank play in the spiral of increasing impoverishment ?
Pakistan has been subjected to the same deadly IMF “economic medicine” as Yugoslavia: In 1999: http://shar.es/Y0Oe9
What about private debt? Odious loans are completely ignored!
See: The IMF Collects Debts on Behalf of the World’s Largest Banks~Michael Hudson http://shar.es/Y0DRM
Unfortunately in last five years the state of economy has been damaged very seriously. Rupee has been printed recklessly; FBR has fialed to increase tax to GDP ratio or bring about efficiency.Government has not tighten it's expenditure and SBP has failed to play it's due role. FBR has become dysfunctional; unless FBR properly taxes all citizens and revenues increase substantially ;Pakistan will pretty soon "default"
may be next government will have a valid excuse of inheriting problems
pakistani version of democracy and these kind of crimes go hand in hand. this government failed all pakistanis so badly that it will need few years to hardly recover.
Pakistan is next Greece or 1980s version Turkey. They too did exactly what is happening in Pakistan; borrowing short term to fund long-term programs, relying on the belief that the market will always roll-over maturing maturities. The market is smart as the IMF is shutting its program is the first warning shot. Hyperinflation will set in, remember Turkish Lira was 3 million to $1 before Erdogan reissued new currency. That will be accompanied by deflation - asset values will lose their value, as is happening in Greece, Iceland and Ireland. Reality is soon going to set-in in Pakistan, than all the academics, including Pasha, are going to be sharpening pencils. No power to run computers to make new model calculations.
Economic team lead by Mr Hafiz Sheikh has caused major disaster to Pakistan economy.On top of it FBR has failed the nation by not raising tax to GDP ratio. With huge short term borrowing,Pakistan has entered classic debt trap
@Logic: Borrowing in local currency is not bad per se but it looks like that unlike World Bank, ADB and IMF the loans given by local banks were of much shorter maturity and also a much higher interest rate putting the country further into a debt trap.
Ofcourse borrowing in foreign currency also has its own issues and Pakistan is already facing them. The imports are getting artifically compressed because the country does not have enough foreign exchange to pay for. If debt servicing itself takes up a large chunk of forex earned through exports and remittances there will be that much less left over for other necessary imports.
Two countries with identical debt to GDP ratio can have very different level of comfort with debt repayment depending on factor such as: 1) Foreign Debt servicing as a ratio of exports 2) Domestic debt servicing as a ratio of revenue collected by government
In turn these would depend on: 1) Maturity profile of the debt 2) Average interest rate of the debt 3) Mix of foreign and domestic debt 4) Tax to GDP ratio which determines the revenue the government collects.
I hope that helps.
Can someone reason why borrowing in local currency is worse than borrowing in foreign currency?
I would say it is us for who it is being borrowed for, why not borrow from us. I would be happier knowing 100% of debt is in local currency.
As far as duration is concerned, for sure there should be more of long term borrowing and duration mismatches should not be done only to reduce borrowing costs.
A good and well-written report and yes it is high time we looked at these indicators in terms of revenues etc rather than the broad measure of total GDP.