Heavy indebtedness of the developing countries is one of the major challenges of 21st century. Public debt remains an important source of government income in developing countries and plays a crucial role in accelerating the economic activities. Government finances its budget and development projects by borrowing.
External debt is also seen as capital inflow having positive effect on domestic savings, investment and economic growth of the country. However, the high level of accumulated debt devises an adverse effect on the investment and the rate of economic growth. The adverse effect of debt in Pakistan is overhang effect of debt. If there is some likelihood that in future, debt will be larger than the country’s repayment ability then anticipated debt-service costs will depress further domestic and foreign investment.
Public debt is the portion of total debt which has a direct charge on government revenues as well as the debt obtained from the IMF. Pakistan’s public debt has two main components, namely external debt (which is raised primarily to finance development expenditure) and domestic debt (which is acquiredessentially to finance fiscal discrepancy). The debt burden can be described through various parameters. There is no single threshold for debt ratios that can describe the “bad” from the “ good”, like debt burden can be expressed in terms of stock ratios i.e. debt to GDP, foreign debt to GDP i.e. debt to revenue and peripheral debt to foreign exchange earnings etc. Important rules about limiting public debt growth must be expressed in relation to revenue growth. If the primary deficit is zero, the ratio of public debt to revenue will not grow as long as the rate of growth, then the growth rate of revenue cannot exceed.
Public debt was recorded at Rs. 19,168 billion at the end of March 2016 registering an increase of Rs.1, 787 billion during first nine months of current fiscal year. By way of this total increase, domestic debt was increased by the amount of Rs.1, 200 billion while government borrowing for financing fiscal deficit was Rs.786 billion.This difference is mainly attributed to increase in government credit balances with State Bank of Pakistan or the commercial banks.
Exposure to interest rate risk reduced as percentage of debt re-fixing in one year decreased to 40 percent at the end of 2015. External debt adjusted for Special Drawing Rights (SDR) around 91 percent of total external public debt is contracted in 3 major currencies i.e. main exposure of exchange rate risk comes from US $ denominated loans (52 percent of total external debt), followed by Euro (19 percent) and Japanese Yen (20 percent). The share of external loans maturing within one year was equal to about 28 percent of official liquid reserves at the end of 2015.
This improvement in public debt to GDP ratio was mainly contributedto reduced twin deficit i.e. fiscal and current account deficit and appreciation of the U.S. Dollar against other international currencies. At end of March 2016, public debt to GDP ratio stood at 64.8 percent which includes an adverse effect of around 2.3 percent of GDP on account to increase in credit balances of government with State Bank of Pakistan, commercial banks and revaluation loss on account of cross currency movements.
However, the economic performance of some past years reveals improved prospects and opportunities for the economy of Pakistan. Economic growth reached at 4.04 percent in fiscal year 2015, while in 2016 GDP growth estimated at 4.71 percent.
The improvement in maturity profile of domestic debt was facilitated by declining interest rate environment as it is more practicable and cost effective for the government to lengthen the maturity profile of its domestic debt. Domestic debt increased by Rs.1, 200 billion during first nine months of current fiscal year and recorded at Rs.13, 399 billion at end March 2016.
This increase mainly shoots from net issuance of PIBsand T-Bills amount to Rs.620 billion and Rs.358 billion respectively, while the stock of MRTBs amounting to Rs.219 billion was retired during first nine months of current fiscal year. The amount of permanent debt in the total domestic debt stood at Rs.5, 767 billion as at end March 2016, representing an increase of Rs.751 billion or 15 percent higher than the stock at the end of last fiscal year.
Floating debt which contains short term domestic borrowing instruments such as treasury bills and State bank borrowing through the purchase of MRTBs. Treasury bills are zero coupon or discounted instruments issued in tenors of 3 months, 6 months and 12 months. The share of 3 months, 6 months and 12 months maturity in total Treasury Bills portfolio was 12 percent, 25 percent and 63 percent respectively as at the end of March 2016. Floating debt recorded an increase of Rs.352 billion during first nine months of current fiscal year and stood at Rs.4, 964 billion at end March 2016. The share of floating debt in overall public debt and domestic debt stood at 26 and 37 percent respectively at the end of March 2016.
The strategic guidelines for managing the public debt reflects the cost risk tradeoffs in the current debt portfolio. Macroeconomic projections indicate a declining public debt to GDP ratio with declining funding needs.While expected low inflation with relatively stable exchange rate may facilitate the extension of maturities for government securities in domestic currency and lower cost for external financing. Based on these considerations, the government evaluated financing alternatives that will help to reduce the exposure of refinancing and interest rate risks and increase the financing from external sources.
There is a need to improve the competitiveness of the economy in order to improve the macro imbalances and mobilize the domestic resources to lessen economy’s dependence on external debt. To reduce the debt burden it is essential to build a favorable environment for investment. Focus of the policies should be on foreign direct investment and export earnings. To avoid poor utilization of foreign debt, consistent debt management strategies should be adopted and profound monitoring system should be introduced.
Further, it is essential for government to implement an integrated approach for the economic restoration and for debt reduction which will encompass trade off in short term. Thus, implementing structural reforms are essential for public debt sustainability and for the potential growth.
— The writer, pursuing PhD Economics, is freelance columnist based in Faisalabad.