The government’s short-term domestic debt obligations, with a maturity period of less than a year, significantly came down to Rs4.6 trillion or 42% of the total debt burden by the end of June, reducing rollover and re-financing risks.
The latest data of the central government’s debt released by the State Bank of Pakistan shows that the government has managed to increase the maturity period of its total debt. When the PML-N government took office in June last year, the country’s short-term debt was Rs5.2 trillion or 54.6% of the total debt.
The short-term domestic debt came down to Rs4.6 trillion or 42.1% of the total debt by the end of fiscal year 2013-14, according to the SBP. There was also 11.5% or Rs596 billion reduction in the short-term domestic debt stock.
However, this has come at a price, as the long-term debt was primarily raised by issuing Pakistan Investment Bonds (PIBs), which is an expensive source of borrowing. The cost of short-term debt was around 9.5% to 10% while the average cost of PIBs is in the range of 12.5% to 12.8%, increasing the country’s debt servicing cost by about 3%.
During the Pakistan Peoples Party government, the composition of domestic debt portfolio has undergone a transformation from a high dominance of unfunded debt to an increasing dependence on short-term floating debt — a source of vulnerability as it entails high rollover and refinancing risks.
The country’s long-term debt, with a maturity period of over one year to 10 years, increased from Rs4.35 trillion to Rs6.3 trillion, showing an increase of Rs1.98 trillion or 45.8% by the end of June. The share of long-term debt was 45.5% in the total domestic debt at the end of June last year. It has increased to 57.8% of the total domestic debt by June this year.
Almost the entire increase was on account of permanent debt that grew Rs1.8 trillion or 84% within a year. Permanent debt, mainly comprises of PIBs, government Ijara Sukuk bond and prize bonds. The permanent debt was Rs2.2 trillion in June last year that increased to almost Rs4 trillion by June this year.
Within the permanent debt, the share of PIBs increased from Rs1.32 trillion to Rs3.22 trillion –an increase of Rs1.9 trillion or 144% within a single year. Contrary to this, the share of Ijara Sukuk of three years maturity came down to Rs326.4 billion –from Rs459 billion of June last year.
The Ijara Sukuk instrument is issued to raise money from Islamic banking which has grown substantially in Pakistan in past few years.
The improvements in the debt portfolio appears surprising as the Debt Management Office remains dysfunctional since the last year due to the government’s inability to hire a full-time director general and other directors to strengthen the office.
In the face of unsatisfactory debt management, the IMF has imposed a condition under its $6.7 billion Extended Fund Facility. According to the structural benchmark, the government will have to issue an administrative order to consolidate the responsibilities of public debt management in the Debt Management Office.
In April this year, Pakistan approved the IMF-devised new Medium-term Debt Strategy, but it had not been practically implemented due to administrative and governance weaknesses.
The Economic Survey of Pakistan for the fiscal year 2013-14 offers a glimpse of the new debt strategy. It states that the focus of new Medium Term Debt Management Strategy is on lengthening the maturity profile to reduce the refinancing risk. It also emphasizes upon sufficient provision of external inflows in the medium term to reduce pressure on domestic resources keeping in view cost-risk tradeoffs.
The share of external and domestic debt in the total public debt remained almost the same in the last fiscal year. The external debt of the federal government excluding the IMF liabilities remained at 31% of the total debt –one percentage points down from the June last year’s position.
The federal government’s external debt stood at Rs4.9 trillion, higher by Rs403 billion or 9% over previous year’s Rs4.5 trillion. By the end of June this year, the total domestic debt stood at Rs10.9 trillion – up by 14.6% or Rs1.38 trillion over June last year.
Published in The Express Tribune, September 7th, 2014.
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The maturity re-profiling of debt shows prudent financial management of any entity or country. I am sure that even if a few lost pseudo-intellectuals of PTI/PAT/PMLQ spew venom against it yet the Multilateral Financial Institutions (MFIs) and the rating agencies will appreciate this prudent financial management of Pakistan.
This govt. is deliberately burdening the country with more debt. They claim that their rationale for longer term debt is to avoid finance/roll over risk. Someone please ask them: 1) What other avenues do banks have to invest/lend their deposits? long term govt bonds are the most lucrative investment with zero credit risk. This eliminates their concern of financing risk. 2) Even if short term debt has roll over risk, the interest rate has been maintained by the central bank. Given the govt. continued to borrow in short term bills, they would still have saved a lot more (by borrowing cheaper instead of the MUCH more expensive long term bonds) to compensate for roll-over risk. Simply bond maths if they only knew how to do it.
The only rationale for borrowing in long term for the govt. has to be one thing: Increase in interest rate by the central bank and given the recent economic developments, that seems out of sight unless IMF arm-twists them into it.
This sums it all up