Business

Bowing down: Country spends 44.5% revenue to service debt

Ate up Rs1.193t; domestic debt comprises major chunk of pie.

Our Correspondent June 05, 2015

Debt servicing ate up Rs1,193 billion during July-March 2014-15 against the annual budgeted estimate of Rs1,686 billion, it said. ILLUSTRATION: JAMAL KHURSHID

KARACHI:

Pakistan spent 44.5% of its total revenue to service debt payments in nine months till March 2015 compared to 47% spent during the same period of previous year, the Economic Survey 2014-15 said.

Debt servicing ate up Rs1,193 billion during July-March 2014-15 against the annual budgeted estimate of Rs1,686 billion, it said.

Around 76% of these payments were made on domestic debt, which has grown in recent years.

As a percentage of GDP, Pakistan’s public debt came down to 61.8% by the end of March 2015, compared to 62% during the same period last year.

Public debt stands at Rs16,936 billion with the major chunk (Rs11,932.2 billion) comprising of domestic debt while component of external debt is around Rs5,004 billion.

Domestic debt increased by Rs1,012 billion in nine months till March 2015 over the same period of last year.

“This increase mainly stems from net issuance of PIBs and T-bills amounting to Rs781 billion and Rs566 billion respectively, while the stock of Market Related Treasury Bills (MRTBs) amounting to Rs605 billion was retired during the first nine months,” states the survey.

While the country’s debt-to-GDP ratio has gradually increased in the last five years, the government has been relying more on medium- to long-term credit instruments including Pakistan Investment Bonds and Ijara Sukuk.

External debt and liabilities stood at $62.6 billion at the end of March 2015 out of which external public debt was $49.1 billion.

“Public external debt witnessed a decline of $2.3 billion during the first nine months of current fiscal year despite net positive disbursements. This reduction in external debt was mainly contributed by translational gain on account of appreciation of US dollar against other major currencies,” the survey added.

During the period under review, disbursements including loans and grants stood at $4,001 million compared with $2,301 million during the same period last year.

“Pakistan also received $2,106 million from the IMF. Importantly, net inflows from the IMF stood at $1,041 million during the first nine months of current fiscal year compared with net outflow of $861 million during the same period last year.”

This pace of external inflows is likely to continue in the future, according to the survey.

Pakistan also returned to the international bond market in November 2014 and issued of $1-billion sukuk bonds.

Published in The Express Tribune, June 5^th, 2015.

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COMMENTS (8)

Atheist_Pakisani | 9 years ago | Reply Thanks for the thought provoking reply. Most of it went over my head but it's fascinating. I hope Isaq Dar reads your blog and decide to do something for the good of the 190 million people instead of the banks.

asad rizvi | 9 years ago | Reply @hamza khan No, this is what you are amusing. I am a professional. I have provided you the data from SBP website. It is for the readers to judge ;) .

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hamza khan | 9 years ago | Reply @asad rizvi: so what you're saying is that the military 'dictator' did a much better job managing the economy than or so called 'democrats'? shocking. as an economics guy the picture is still gloomy. economy is being managed by an accountant, not by professional economists of which there are no shortages in pakistan of.

asad rizvi | 9 years ago | Reply @Atheist_Pakisani Yes, government borrowings and high discount rate is the real cause for poor economic growth. To give you reader better understanding, bank investment in government paper is around Rs 4 Trillion. Since November 18, 2013 SBP has slashed Discount Rate by 300 basis points to 7 percent. This mean based on total current holding of Rs 6.791 trillion government securities’ debt burden will be reduced by Rs 203 billion on annual basis. In addition to Rs 203 billion interest payment that government is expected to save due to a 300 basis point slash in discount rate based on current PIB holding of Rs 4.046 trillion. On an average, a 2.25 percent cut in coupon government will save another amount of Rs 91 billion annually. However, so far rate cut could not give respite to the ailing economy, as reading of SBP economic data shows credit to private sector grew by mere Rs 162 billion. It is estimated that 25 percent of the fall in private sector growth is caused by easing of commodity prices. Whereas, banks are extremely comfortable to invest in nearly zero-risk government paper, which is still too attractive because PIB coupons of 3-10 years ranging between 8.75 and 9.75 are very appealing. Banks are not too much concerned with the current pace of rate cut, which in my view is still very tempting. At 7 percent discount rate of 6.5 percent “Target Rate”, I do not see any reason for economic stimulation unless discount rate is slashed by another 100 basis points and coupon rate slashed by another 250 basis points. Hence overall benefit in shape of debt reduction in interest payment after a slash of 400 basis points rate cut would be RS 263 billion and 4.75 coupon rate cut would save Rs 192 billion. While, there is another Rs 65 billion debt saving against Unfunded Debt of Rs 2.645 trillion under the head of Government Domestic Debt and Liabilities, which amount to total annual saving of Rs 520 billion. If rates and coupon are further slashed, then credit for such a huge amount of savings will go to government’s favour. Furthermore, it is worth nothing that the current break-up of banks total Statuary Liquidity Requirement (SLR is PIB 15 percent, T-bill 4 percent and cash 5 percent), which means PIB investments by banks in excess of 15 percent, will not be part of SLR. But banks can invest in T-bills up to any amount that can be part of their reserve requirements. Therefore, for economic stimulation purpose, my proposal is that investment in government securities should be capped with maximum investment allowed up to PIB 21 percent. Any percentage of excess investment should be taxed and simultaneously certain percentage of excess investment in government paper that can be worked out should be made conditional lending to private sector. Or else with present strategy and current level of discount rate and return on investments, it is so attractive that banks will not respond to SBP’s rate cut and its growth effort will go to waste. The biggest risk is that Chinese investment based at current policy rate and after including the risk cost is still too costly from the investor’s perspective that could backfire if SBP and Ministry of Finance (MoF) remain too complacent.

Atheist_Pakisani | 9 years ago | Reply I don't know much about economics or how banks works. But is this the reason why banks are making record profits and incredible growth? I have a feeling something really really bad is going on right now. How can bank make such incredible profit and growth in the economy like Pakistan?

H. Khan | 9 years ago | Reply The biggest problem of the country is extremely low tax base and extremely disappointing tax collection by FBR. FBR once again has failed the nation totally The Government should immediately adopt the recommendations of the Tax Reform Commission .We are very hopeful that the recommendations of tax Reform Commission will double the tax collection and the country will become prosperous

asad rizvi | 9 years ago | Reply It is regrettable that for nearly a decade, Pakistan's economy is faced with a cash crunch (domestic and external), as government spending exceeds revenue collections, causing budget deficits because of non-friendly fiscal and monetary policies. This situation has arisen because successive governments during their tenures remained focused on managing their books. The problem persists because we deviate from established Standard Financial Procedure, commonly known as Creative Accounting. Evidence of weak economic policies of past and present is clearly visible, manifesting itself in increased government borrowings, almost stunting private sector growth. This is why central bank's profit is either at par or exceeds private sector lending, as banks are lured to make investment in government paper. Take a look at another example why credit expansion has thinned despite SBP's constant liquidity injections. Commercial banks' portfolio of advance/deposit ratio (ADR) of past few years are clearly tilting downwards Rs 8.747 trillion versus Rs 4.472 trillion, which is 51.13 percent. That the drop in ADR reached 22 percent in the last 10 years is another valid proof of weak fiscal policy responsible for rising unemployment and poverty rate, low revenue collection and high fiscal deficit that helped to push inflation and discount rate at extreme highs. The proof of pudding is in its eating. Here is the economic disconnect and to determine the total damage caused to the economy can be derived from country's total debt that has breached 60 percent limit. In 2005 total debt amount was Rs 4.191 trillion. In 10 years, by the end of FY2014-15, Pakistan's total debt (external and domestic) surged by Rs 14.352 trillion to Rs 18.543 trillion. Then annual cost of debt servicing was Rs 300 billion against FY 2014-15 (current) cost of Rs 1.2 trillion (approx). Similarly, another alarming economic number is a sharp surge in Debt to GDP ratio that was brought down from 88 percent in 2001 to 57.8 percent in FY 2006. But since then it is constantly climbing and has comfortably breached the 60 percent benchmark debt limit to hit the highs of 63.8 pct (current), which is in violation of fiscal responsibility law. Nothing can be achieved without documentation of economy, which is the mother of the ills.

mahakaalchakra | 9 years ago | Reply WOW, 44.5% of the yearly budget goes on debt service and add to this the direct and indirect budget for the Pakistani armed forces (almost same percentage), you will find very less left for the welfare of general public if you deduct salary of the federal government staff and pension. Thank you Saudi, USA and Chinese grants for taking care of 190 million Pakistani public. Any comments from knowledgeable readers?

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