The public debt of the country has increased 12.3 percent or Rs 1.315 trillion to Rs 12.024 trillion during the July-March period of the current fiscal year, which will have implications for the economy in the shape of a greater amount of resource allocation towards debt servicing in the future, reveals the Economic Survey 2011-12.
The increased amount includes Rs391 billion consolidated by the government into public debt against outstanding previous years subsidies related to the food and energy sectors. Public debt as a percent of GDP stood at 58.2 percent by end-March 2012 compared to 55.5 percent of GDP during the same period last year.
Historically, public debt stock accounted for almost the same burden from domestic and external sources. However, government has increasingly focused on the domestic part over the last few years owing to non-availability of sufficient external financing i.e. domestic borrowings inched up in share from 46.6 percent in fiscal year 1990 to 59.9 percent at end March, 2012.
Pakistan’s public debt position declined slightly in the current fiscal year. A host of internal and external factors contributed to the decline. Higher interest payments, large subsidies specially food and energy, growing security spending needs, narrow tax base and rising international commodity prices have resulted in large twin account (i.e. fiscal and current account) deficits. Prudent government policy will be necessary to address the issue of public debt.
Servicing of Public Debt: Increases in the outstanding stock of total public debt have implications for the economy in the shape of a greater amount of resource allocation towards debt servicing in the future. In order to meet debt servicing obligations, an extra burden is placed on limited government resources and might have costs in the shape of foregone public investment or expenditure in other sectors of the economy. The increase in domestic debt servicing is partly the result of a tight monetary stance taken in order to arrest the monetary overhang caused by previous policies.
Domestic Debt: Pakistan’s domestic debt comprises permanent debt (medium and long-term), floating debt (short term) and unfunded debt (made up of the various instruments available under the National Savings Scheme) having shares of 21.6 percent, 54.5 percent and 23.9 percent respectively in total domestic debt. Banks’ preference of risk-free sovereign credit in view of mushrooming nonperforming loans augured well for the government securities market and overwhelming participation was witnessed in the auctions of T-Bills, PIBs and Government Ijara Sukuk.
Failure to issue new debt in order to mature a large amount of outstanding short term debt may trigger a liquidity or debt rollover crisis. The increase in frequency of such operations (due to their short term nature) coupled with any adverse rise in interest rates may leave the government vulnerable to the high cost of debt.
Outstanding Domestic Debt: The total domestic debt was positioned at Rs7.206 trillion at end-March 2012, representing an increase of Rs1.190 trillion in the first nine months of the current fiscal year. This increase stems from net issuance of market debt namely Treasury bills (Rs576.4 billion) and PIBs (Rs307.5 billion). In relation to GDP the domestic debt stood at 34.9 percent which is higher than end-June 2011 level at 33.4 percent. The domestic debt grew by 19.8 percent in first nine months of current fiscal year. The focus on deficit financing through internal sources owing to lower external receipts has been the major cause.
External Debt & Liabilities: Pakistan’s external debt and liabilities (EDL) include all foreign currency debt contracted by the public and private sector, as well as foreign exchange liabilities of the State Bank. The EDL has been dominated by Public and Publically Guaranteed Debt having share of 76 percent owing to current account deficit which is financed through loans from multilateral and bilateral donors. Debt obligations of the private sector are fairly limited and have been a minor proportion of the EDL (6%). Borrowing from IMF contributed 13% in EDL Stock which was intended for Balance of Payment (BoP) support and is reflected in foreign currency reserves of the country.
Disbursements: During July-March 2010-11, disbursements of $1.660 billion were for different purposes like Project Aid ($1.113 billion), Programme loans/Budgetary Support ($99 million) and relief ($448 million). Project aid accounted for 67percent of the total disbursements.
External Debt Servicing: During fiscal year 2011, external debt servicing summed to $4.799 billion that is 14.3 percent lower than the previous year. A segregation of this aggregate number shows a payment of $2.348 billion in respect of maturing EDL stock where interest payments were $963 million. $1.488 billion was rolled-over.
