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Debt dynamics and its frightening burden in Pakistan

Published on 26th Oct, Edition 43, 2015


Every Pakistani owes over Rs 101,338 in debt
Govt should raise capacity to monitor and manage public debt

The debt market is a market for trading the debt instruments like TFCs, Bonds, T-Bills, Commercial Papers, Participation Term Certificate, Corporate and Federal Bonds etc. A debt market establishes a structured environment where these types of debt can be traded with comfort between interested parties.

The debt market is also known by other names. Based on the types of debt instruments these are traded in that market. The debt market deals mainly with the trading of municipal, corporate and Federal bond issues or National Savings Bond. It may be known as a bond market. If mortgages and notes are the main focus of the trading, the debt market may be known as a credit market.

The bond market in Pakistan covers debt and debt like securities issued by the government, statutory corporations and corporate entities. The market is regulated under the Regulation Governing Bonds Automated Trading Regulations. The Securities and Exchange Commission of Pakistan (SECP) has identified the development of a vibrant debt market as one of its key focus areas. Based on the recommendations of a Review Committee, the Bonds Automated Trading System (BATS) is currently being re-vamped.

Total liabilities

As of March 2015, the total debt liabilities of the country stood at Rs19, 299.2 billion. Every Pakistani now owes a debt of about Rs101, 338. This figure was Rs90, 772 in 2013. It was estimated at Rs80, 894 in 2012 and was only Rs37, 170 in early 2008.

Pakistan recorded a Government Debt to GDP of 64.30 percent of the country’s Gross Domestic Product in 2014. Government Debt to GDP in Pakistan averaged 69.75 percent from 1994 until 2014. It reached an all-time high of 87.90 percent in 2001 and a record low of 54.90 percent in 2007. Latest figures shows that the debt-to-gross domestic product ratio stands at 66.4 percent, in which foreign debt is Rs6.4 trillion and domestic debt is Rs12 trillion.

Government debt as usual acts as a percent of GDP. It is used by investors to measure a country’s ability to make future payments on its debt. It affects the country borrowing costs and government bond yields.

Pakistan debt has grown vastly since 2007, with every governments making huge borrowings, forcing the country towards a debt unpleasant situation.

The external debt servicing reached close to $7 billion in fiscal year 2014, which is about 50 percent of the current reserves of the State Bank of Pakistan.

Pakistan paid $6.820 billion in debt servicing in fiscal year 2015, including $5.910 billion as principal amount and $915 million in interest payments. Distressing is that 47 percent of whatever the government generates in revenue is going to pay off debt against 44 percent in the last year. Experts are of the opinion that this ratio should be less than 30 percent to allocate more resources to poverty-related expenditures.

Next generation miseries

In Pakistan approximately 60 percent of the population lives below the poverty line and 58 percent constantly faces food insecurity. This is a great burden and more miseries for the next generations. The impact of huge debt burden on the people is terrible. Social spending has drastically lessened Pakistan spends only just 2 percent and 2.6 percent of its GDP on education and health respectively, which is the lowest in South Asia.

Pakistan paid Rs1.704 trillion to service its overall debt during the previous fiscal year. Interest payments on the debt increased phenomenally, the repayment of principal amount on external debt declined to Rs358 billion from Rs608 billion a year ago, which helped reduce the overall debt and liabilities servicing by 4.9 percent.

Owing to severe shortage of revenue, the government is forced to borrow more from both external and domestic sources. The external borrowing has helped the government build foreign exchange reserves to a record $18.5billion this year.

The interest payments on domestic debt are rising each year. The government has paid Rs3.123 trillion since 2013 because of large accumulation of debts through Pakistan investment Bonds and treasury bills.

Banks and the corporate sector hold PIBs, T-bills and sukuk worth over Rs7 trillion which requires massive debt servicing, which is about 40 percent of the government’s revenue collection.

Independent economists and analysts have criticised the government’s borrowing strategy which they say has failed to induce economic growth. During the last two years, the government added Rs3.526 trillion to the domestic debt, which was Rs19.914 trillion at the end of fiscal year 2015. It was also observed that due to massive borrowing from banks, the government has deprived the private sector of borrowing from banks. On the other hand, banks also find it safe to earn easy profits by investing in risk-free government papers.

The fact is that liquidity is being generated through borrowing, the development funds have to see a cut each year, which disturbed the economic growth. Analysts and economists have indicated that the debt and interest repayments would rise by next year when Pakistan’s repayment to the IMF increases.


ADB’s mission

The Asian Development Bank is in the process of forming a project team to work with Pakistan to design and give priority to the financial sector’s growth and diversification. Its consultation mission has already discussed with the government a proposed technical assistance loan of $10 million equivalent from the Asian Development Fund to finance the financial sector and debt management project and the accompanying small-scale policy and advisory technical assistance for $225,000 on a grant-basis by the ADB’s Technical Assistance Special Fund.

The ADB feels that the corporate debt market is underdeveloped and the private sector is heavily dependent on the banking sector for finance.

Nevertheless, the government has limited capacity to monitor and manage public debt and contingent liabilities in a broad manner. It is estimated that priority infrastructure projects in the power sector alone need long-term financing of $9.7 billion from the public sector and $14.9 billion from the private sector.

According to the ADB, the availability of financing for energy, transport and other infrastructure projects from capital markets is extremely limited. Infrastructure finance from banks has been static for many years for a number of reasons, including concerns about circular debt; a strong bias towards asset-backed corporate loans and risk-free public debt; and banks’ internal portfolio preferences.

SBP’s guideline

To help address this gap, the State Bank of Pakistan (SBP) has issued guidelines on infrastructure project financing and developed proposals for an infrastructure financing vehicle that would issue long-term conventional bonds and Sukuks to generate funds from the local market.

In order to identify long-term sustainable solutions for encouraging trading activity on Bonds, the Securities & Exchange Commission of Pakistan (SECP), in consultation with the relevant stakeholders constituted a committee comprising of representatives from SECP, KSE, NCCPL, Mutual Fund Association of Pakistan (MUFAP), Financial Markets Association of Pakistan (FMAP) and Brokers to review Bonds Automated System (BATS) to determine reasons for poor market reception of BATS.

Future measures

The debt situation is frightening and the government must review its careless borrowing performance. It is necessary that there must be an audit of the public debt. All new loan contracts should be subjected to an approval in parliament.

The government must cease useless international borrowing and lessen reliance on foreign debt in the future and take measures to get the illegal and unlawful loans cancelled. There is the need for a debt-free Pakistan and making the people of Pakistan the real operators of the economy.

During election campaign leaders made large claims that on assuming power they will get rid of the of the deadly suffering debts. Unfortunately there is very little evidence of measures towards freedom from debt. The government is knocking on the doors of international lenders even more vigorously than the past governments.


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