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Importance of effectual debt management

Published on 15th Aug, Edition 33, 2016

Public debt mounts to Rs 18.9 trillion

Effective debt management is necessary for developing a feasible and stable debt portfolio. It mitigates the risks of refinancing, exchange rate fluctuations and debt accumulation that could impede economic growth and stability. Prudent utilization of debt leads to high economic growth and assists the government to accomplish its social and developmental goals.

DEBT POSITION IN PAKISTAN (Rs. in billion)
Year Public debt Domestic debt External debt
FY03 3,694 1,895 1,800
FY04 3,866 2,028 1,839
FY05 4,211 2,178 2,034
FY06 4,359 2,322 2,038
FY07 4,802 2,601 2,201
FY08 6,126 3,275 2,852
FY09 7,731 3,860 3,871
FY10 9,006 4,654 4,352
FY11 10,767 6,017 4,750
FY12 12,695 7,638 5,057
FY13 14,318 9,522 4,797
FY14 15,991 10,920 5,071
FY15 17,381 12,199 5,182
FY16(Mar) 19,168 13,399 5,769

Unsustainable level of debt coupled with absence of prudent debt management policy may plague economic growth because of heavy debt servicing requirement resulting in lower development expenditure.

Given Pakistan’s developing status, the need for effectual debt management is of utmost importance as the country requires borrowing to enable its development plan, accelerate the pace of economic growth without ignoring the foreign impact.

It is calculated that Pakistan’s public debt grew 6.18 percent to Rs18.9 trillion in the 6-month period to December 2015, but the debt-to-GDP ratio dropped to 61.5 percent. The expert said that the public debt reached at Rs17.8 trillion as on end-June 2015. The major part of the public debt was local; however, the external debt also considerably increased.

CURRENCY WISE PUBLIC DEBT* (in US$)
Currency Percentage
Pak Rupee 71.7
US Dollar 10.6
Special Drawing Right 8.7
Japanese Yen 5.1
Euro 2.4
Others 1.5
Total 100.0
*As per modalities of MTDS

According to the statistics, Pakistan’s domestic debt expanded Rs687.1 billion in the first half compared to rise of Rs602.7 billion in the corresponding period of the last year. During the first half, the Government of Pakistan borrowed a net amount of Rs2.6 trillion from banks through primary auctions. The second quarter primary auctions showed an ease in government borrowing as it accepted Rs1.12 trillion lower than the target of Rs1.37 trillion and maturity of Rs1.14 trillion. The slowdown in government borrowing to substantial external inflows, Ijara Sukuk auction in December and mobilization of Rs208.5 billion by outright purchase of the same instrument on deferred payment basis in November 2015.

External debt rose to $57 billion by end-December 2015 as against with $54.67 billion in June 2015. The external debt servicing obligations are not greater than $6 billion per annum until 2020. This amount of repayments doesn’t grow much concern, as Pakistan has fruitfully met similar amount of obligations in FY2013 and FY2014. Thus, debt servicing of $5.5 billion due this year (2016) are well within the manageable level, particularly keeping in view the existing level Pakistan’s forex reserves and a predicted continuation of forex inflows.

At the December-end, gross inflows received by the country included $561.4 million from China chiefly for energy sector infrastructure projects; inflows from the Asian Development Bank, counting $47.2 million under Social Protection Development and $394 million for sustainable energy reform; $489.4 million from International Development Association under power sector reform development; and $500 million as proceed of the Eurobond issued in 2015. The external debt servicing fell $549 million to $1.65 billion during the first half of the last year (2015-16) as against to $2.2 billion in the corresponding period of the last fiscal year. That was because of a significant decline in repayment to the International Monetary Fund (IMF) to $74.3 million for the period as against to $874.4 million as at June 30, 2015.

In a nutshell, it is not denying the fact that a developing state has to rely on borrowings in order to attain its overarching goals of economic stability and nationwide development.

Appropriate debt management is the prerequisite for the sustainable economic growth of a country. There must be equilibrium in imports and exports so as to minimize the need for borrowing and overcoming fiscal deficit.

Unluckily, the ever-rising foreign debt is one of the main issues besetting Pakistan’s lingering economy. Our country is the third largest debt-recipient country in the region. Its external debts have been reported to reach 33 percent of the GDP as against to India’s 15 percent and China’s 7 percent.

There are numerous factors, counting local issues and global economic recession, behind this debt dynamics. The growing debt-to-GDP ratio is chiefly because of falling-tax-to-GDP ratio as out of 190 million only 1.8 million people pay tax. Rampant corruption is the key factor in this regard. Pakistan is not in a position to formulate an independent fiscal policy because of these external debts and its struggling economy is at the mercy of leading lenders like the IMF and World Bank.

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