Circular debt enlarges debt stock by Rs572 billion

Settlement of circular debt of power sector PSEs and public procurement agencies resulted in a substantial Rs572.2 billion increase in the stock of total debt & liabilities (TDL), during the first five months of FY12. With the addition of circular debt, the quantum of total debt had mounted to Rs12.7 trillion. However, after adjusting for this one-off factor, the increment in TDL stock shows a lesser magnitude during Jul-Nov FY12 as compared to the same period last year.
Furthermore, as external inflows tapered, the pressure of financing the fiscal deficit has fallen on domestic banking and non-banking sources. While this trend may bode well in terms of external indebtedness, it has adverse implications for the private sector. Moreover, declining foreign inflows is also putting pressure on Pakistan’s FX reserves to finance current account deficit. State Bank of Pakistan had mentioned these developments in its first quarterly report for FY12.
GOVT DOMESTIC DEBT: The rising borrowing needs of the government were largely met from the banking system through short term floating debt instruments. This resulted in further amplification of scheduled banks holding of domestic debt to 37.7 per cent on end-Nov 2011 from 33.4 per cent on end-Jun 2011.
FLOATING DEBT: MTBs held by scheduled banks were one of the chief sources of financing the circular debt settlement in November 2011. Specifically, government raised around Rs200 billion from 12-M MTBs in the auction held on November 4, 2011. On the upside, the maturity profile of floating debt has seen an improvement, after the monetary policy loosening by SBP in Jul and Oct 2011. This is, due to a shift in commercial banks investment towards 12M T-bills instead of the shorter tenor bills. This shift towards longer tenor securities will reduce the roll-over and interest rate risk faced by the government. Furthermore, as a result of the SBPs efforts to diversify investors, the amount raised though the non-bank sector in MTBs auctions has also increased sharply.
Encouragingly, the stock of government debt held by SBP registered Rs 45 billion reduction during Jul-Nov FY12 over the end Jun 2011 position. As the government is trying to keep additional budgetary borrowing from SBP at zero level, Rs 103.5 billion were retired to SBP during Q1-FY12. However, it had to resume borrowing from SBP in Oct 2011 as the cut in policy rate and the resultant fall in MTB yields has dented scheduled banks incentives for investing in government paper. Resultantly, government had to borrow from SBP to settle the maturing amount.
PERMANENT DEBT: The inflows through permanent debt continued the rising trend witnessed since Q2-FY11. Specifically, in the auctions held during Q1-FY12, Rs 52.2 billion were raised through PIBs, against a target of Rs 50 billion. However, permanent debt stock recorded a surge in Nov 2011, as the government raised a hefty amount of Rs 195.0 billion for the circular debt settlement through 5-year PIBs.
UNFUNDED DEBT: The inflows into NSS instruments recorded a healthy 20.1 per cent increase in Jul-Nov FY12 over the same period last year. An analysis of monthly inflows shows that the downward revision in NSS rates (in Oct 2011) has not, so far, discouraged investment in these instruments.
EXTERNAL DEBT: Pakistan’s external debt stock fell by $255 million on end-Nov 2011, from its June 2011 position, as compared to the hefty increase witnessed during the same period last year. However, after the suspension of the IMF program in FY11, the weakening of external loan inflows was anticipated. The early suspension of the IMF program sent negative signals about country’s macro-economy to other IFIs, which has halted their pipeline assistance.
GOING FORWARD: With the risks mentioned to fiscal outlook above and weakening of external inflows, the stock of domestic debt is likely to continue the rising trend. As regards the servicing of debt, although the cut in policy rate has reduced the cost of borrowing, these gains are likely to be partially offset by the adverse movement in the Pak Rupee with rise in Rupee cost of external debt servicing. Thus, in overall terms, debt servicing as a share of government’s revenues, which already stood at 43.3 perc ent in FY11, is likely to increase further going forward.