Public debt has exceeded 60% of GDP limit under the FRDL Act

ISLAMABAD: The finance ministry has disclosed that total Public Debt of the government over the last five years has exceeded the prescribed limit of 60 % of GDP under the Fiscal Responsibility and Debt Limitation Act 2005.

The Finance ministry in its fiscal Risk Statement 2023-24 states that total public debt (TPD) is a measure of government indebtedness. 

The total public debt has reached to Rs59247 billion in March 2023 from Rs 24953 billion in FY 2018. This included debt of the government (including the Federal Government and the Provincial Governments) serviced out of the consolidated fund and debt owed to the IMF, under the FRDL Act, 2005.

In addition, the external debt and liabilities have recorded $126 billion in March 2023 which was $95.2 billion in FY2018.

The violation of FRDL Act is primarily due to consistent fiscal deficits, averaging 6 % of GDP since 2010, which have led to a rapid build-up of debt. 

Total Public Debt can increase due to both budgetary and non-budgetary factors, such as unfavorable movements in interest and exchange rates and the realization of contingent liabilities 

The report states that ongoing fiscal deficits require refinancing of the Government’s maturing debt while raising additional debt to fulfill the fiscal shortfall. 

A high level of short-term debt creates potentially significant refinancing challenges during periods of slower economic growth, higher fiscal deficits, and lower investor confidence. To manage the refinancing risk, it is important for the government to achieve and maintain a longer average time to maturity (ATM) of its domestic as well as external debt. This means that the government should issue debt with longer maturities, which will reduce the frequency of debt rollovers and decrease the refinancing risk, in line with the current Medium Term Debt Strategy.

The Finance Division sets the target for domestic debt at 4 years ATM and 7 years ATM for external debt with GFN/GDP at 27 percent in its Medium Term Debt Strategy 2019-2023. 

For FY2022, the ATM of Domestic Debt was reported at 3.6 years, falling short of the targeted ATM of 4 years. However, the government is determined to implement stronger fiscal discipline, decrease its fiscal deficit, reduce its borrowing requirements, and rely on longer term instruments for domestic borrowing. These actions are expected to meet its targets.

In FY2022, the ATM of external debt was also recorded at 6.2 years, below the target of 7 years. The government has borrowed significant amounts in recent years by utilizing commercial sources such as medium to long-term Eurobonds and short-term bank loans resulting in decline in ATM of external debt. 

The TPD violating the FRDL act is not only an indication of poor fiscal management in the past but also rings alarm bells for the upcoming years.

Meanwhile, the stock of government guarantees also stood at 4.5 % of GDP at the end of FY2022. 

It is important to note here that guarantees issued against commodity operations are not included in the estimated stock right now in annual limits imposed on new issuances. This is done because the loans are secured against the underlying commodity and are essentially self-liquidating. 

The FRDL Act 2022 imposes a limit on the issuance of new government guarantees, including rollovers of existing guarantees, to 2 percent of GDP per annum and 10 percent of GDP limit on guaranteed stock.

A government guarantee is an agreement between a financial institution and a government. It typically stipulates that if a borrower were to trigger an event of default that could not be resolved, the government would make the financial institution whole on its exposure.

In addition to the exclusion of certain contingent liabilities from the stock limit, oversight and active management of guarantee and other contingent liability flows is embryonic – while the need for management of potential fiscal risks related to PPP contracts, subnational governments, and government contracts has been recognized, governance and capacity to do so effectively is in development.