Government taking steps to reduce debt burden

The government is taking steps to reduce the debt burden of the country, place the debt to GDP ratio on a firm downward trajectory and bolster macroeconomic stability.

According to official sources, public debt shall be reduced to less then 60 percent of estimated GDP until 2017-18 and thereafter a 15 year transition has been set towards a debt to GDP ratio of 50 percent.

The government has made amendments to the Fiscal Responsibility and Debt Limitation (FRDL) Act by defining the ceiling for the Federal Government budget deficit at 4 percent of the GDP excluding foreign grants during the period 2017-18 to 2019-20 and 3.5 percent of GDP thereafter.

Gross public debt was at Rs 20,873 billion by end March 2017 while net public debt was Rs 18,893 billion.

Gross public debt recorded an increase of Rs 1194 billion during first nine months of current fiscal year.

Out of this total increase, hike in domestic debt was Rs 1121 billion while government borrowing from domestic sources for financing of fiscal deficit was Rs 1018 billion.

This differential is mainly attributed to increase in government credit balances with the banking system.

Similarly, increase in external debt contributed Rs 73 billion in public debt.

Revaluation gain on account of appreciation of US dollar against other foreign currencies reduced the impa ct of net external inflows on external public debt portfolio. The average cost of gross public debt was reduced by 40 basis points during first six months of current fiscal year owing to smooth execution of the Medium Term Debt Management Strategy (MTDS).

The average cost of domestic debt portfolio was reduced by over 50 basis points during first six months of current fiscal year while the average cost of external loans obtained by the present government comes to around 3 percent which is significantly lower than the domestic financing cost even after a margin of capital loss due to exchange rate depreciation is added.

The government was able to mobilize external inflows from multilateral and bilateral development partners and continued its presence in international capital markets through the issuance of Sukuk during first nine months of current fiscal year.

An improvement was observed in most of the public debt risk indicators during last three and half years in line with the objectives set forth in Pakistan’s first MTDS (2013).

Refinancing risk of the domestic debt portfolio reduced through lengthening of the maturity profile as percentage of domestic debt maturing in one year was reduced to 52.7 percent at the end of December 2016 compared with 64.2 percent at the end of June 2013.

Exposure to interest rate risk was also reduced as the percentage of debt refixing in one year decreased to 45.5 percent at the end of December 2016 compared to 52.4 percent at the end of June 2013.

Similarly, share of external loans maturing within one year was equal to around 31.9 percent of official liquid reserves at the end of December 2016 as compared with around 68.5 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.

The public debt analysis may be incomplete without reporting contingent liabilities. Contingent liabilities are not added to the overall debt of the country. Therefore, public disclosure of information about guarantees is an essential component of fiscal transparency.

Contingent liabilities of Pakistan are guarantees issued to Public Sector Enterprises (PSEs).

During first half of current fiscal year, the government issued fresh/rollover guarantees aggregating to Rs 368 billion or 1.2 percent of GDP. The outstanding stock of government guarantees as at end December 2015 was recorded at Rs 838 billion. It is imperative to have a comprehensive debt management strategy aiming at debt sustainability and enhancing the debt servicing capacity of the country.

Owing to its vital importance and indispensable nature, the government updated its MTDS which contains a policy advice on an appropriate mix of financing from different sources with the spirit to uphold the integrity of the Fiscal Responsibility and Debt Limitation Act.

In accordance with the approved strategy, the government was required to lengthen the maturity profile of its domestic debt and mobilize sufficient external inflows in the medium term.

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