The Ministry of Finance has started formulating debt and risk management strategy framework for raising funds from external markets, which will contribute fiscal sustainability while minimizing the funding costs and keeping the debt exposure under control, it is learnt.
According to the concept documents of the External Finance Wing of Ministry of Finance, available with Pakistan Today, the government needs to step up the reform efforts and for this, filling-in key gaps are the critical barriers. Despite early gains in the economy stability and implementing initial actions on the structural reforms agenda, the knowledge gaps, weak capacity to complete the design and implementation and difficulty in securing the buy-in of all interested stakeholders poses downside risks to the economic reform program, the documents highlighted.
More specifically documents say the strategy will provide assistance for key federal and provincial ministries and agencies to expand and sustain the fiscal space and revenue collection; liberalize trade and economic activities; facilitate private investment; improve the quality of expenditures and debt management and tackle other binding constraints facing the economy.
The documents point out the fiscal management is major concern now for the government. More specifically, one of the two development objectives and reform pillars are to structure around enhancing fiscal management. The reforms supported under this pillar sought to enhance the effectiveness of public investments by creating the necessary fiscal space for higher public investment and more pro-poor spending.
Furthermore, documents point out, one of the four main reform areas under the recently concluded International Monetary Fund (IMF) Extended Fund Facility (EFF) focused on sustaining fiscal consolidation by broadening the tax base and strengthening the medium-term fiscal framework.
Debt management was one of the agreed areas under these interventions. Moreover, a USAID recent project aimed at improving domestic financial markets in Pakistan attempts to complement the support under the broader area of debt management. The focus of the programme, however, is different – on regulators such as SECP, SBP (central bank) and the stock exchanges, sectoral and institutional context. Pakistan, like many other oil importing countries, is benefiting from low oil prices, which has reduced the trade deficit (in spite of a notable decline in exports) and increased consumption.
Fast-growing remittances and rising investments under the China Pakistan Economic Corridor (CPEC) have also supported growth, the concept papers mentioning point out the risk of a balance of payments crisis which appeared eminent in 2012-13 has receded, with a significant increase in international reserves resulting from strong remittances, foreign capital and financial inflows and the windfall gain from lower oil prices.
With prudent monetary and fiscal management, documents say, the current account deficit remains moderate and the foreign exchange market has been stable. However, contraction fiscal stance and mild recovery of GDP in recent years has been insufficient to reverse debt dynamics of Pakistan as Pakistan’s debt to GDP ratio has increased to 67.4 per cent in 2015-16 compared to 64.1 per cent in 2012-13, above the 60 percent limit stipulated in the fiscal responsibility and debt limitation Act (FRDLA) of 2005. Additionally, interest payments on public debt continue to absorb a large share of government’s revenue.
Over the last five years, the documents mention, there have been some significant changes in the federalism landscape of Pakistan. The 7th NFC Award sharply increased the share of provinces in federally collected revenue, while the 18th Constitutional Amendment has introduced some profound changes in multi-order governance in Pakistan, including devolution of significant number of additional functions from the federal to the provincial governments.
The concept documents specially mention the Federal pillar aims of improving debt management practice in the federal government by assisting the authorities strengthen three key functions: (i) formulation of a debt management strategy and risk management in the Debt Policy Coordination Office; (ii) external debt recording and reporting in the Economic Affairs Division; and (iii) funding in the external markets in the External Finance Wing, Ministry of Finance.
Nonetheless, the documents specify the staff capacity building at the cornerstone of the strategy. The sub-national component (currently operational in Punjab and Sindh with the potential to expand to KP/Balochistan) entails building the capacity of the sub-national governments to undertake the existing and additional debt management role in the most efficient and effective manner.
Additionally, the strategy includes two stand-alone Recipient Executed Trust Funds for (i) MoF — DPCO and EF Wing, and (ii) Economic Affairs Division to enable the client agencies to undertake activities designed for their specific focus areas. ‘This strategy is essentially one of the envisaged RETFs. 8. Debt management at the federal level, is scattered among various institutions and entities, most of them within the Ministry of Finance (MoF), with little coordination among them. Federal debt management operation includes the Budget wing (MoF), External Finance wing (MoF), State Bank of Pakistan (SBP), Central Directorate of National Savings (CDNS), Economic Affairs Division (EAD), and Debt Policy Co-ordination Office (DPCO). ‘Of the six units involved, no single entity has overall responsibility and necessary authority to achieve the debt management objectives and the strategic goals.
Although SBP is just a fiscal agent and all other debt entities are located within the MoF, the coordination amongst those remains weak and there is limited planning on how the different sources should contribute to the total funding in a manner that addresses the risks of the current portfolio, while promoting the development of the market for government securities. Also, no single unit has developed a critical mass of expertise in designing and implementing an overall funding program aligned to the government objectives.
After a gap of almost a decade, Pakistan once more entered the international capital market with the issuance of US$2.0 billion Eurobonds in April 2014. Subsequently, it maintained its presence in the market in the succeeding year through regular issuance of Sukuks and Eurobonds. The structures and capacities at EF wing in MoF, are geared towards managing official financing, less so for managing market funding transactions that require agility in determining the timing, structure and other parameters in the transaction. Currently EF wing execution functions are partly outsourced and the unit’s functions revolve exclusively around supporting the transaction. Given Pakistans increasing reliance on Eurobonds and international Sukuks, there is a need to develop institutional capacity to lead these operations backed by strong technical underpinnings by EF wing.