Debt sustainabilities of pakistan

 

Pakistan's key debt sustainability indicators deteriorated markedly in the first half of this financial year amid a sharp currency devaluation and rising interest rates, the Finance Ministry's semiannual debt report said. The report from July to December 2022 shows that the proportion of foreign public debt has increased in the past six months, while the average maturity and interest rate adjustment period continue to be shortened.

This is in sync with historically high-interest rates and a 56% depreciation in the currency since the current government came to power a year ago. The report shows that the ratio of foreign debt to total public debt has fallen from 37% in June to 37.2% in December, increasing exchange rate risk and concurrently with the depreciation of the dong. rupees and the reluctance of foreign countries to grant loans. The debt office publishes a semiannual Debt Bulletin containing information on debt stock, debt activity, and sources of changes in debt stock on a semiannual basis. According to the report, “Large payments abroad following low foreign exchange reserves can cause liquidity problems and even destabilize exchange rates, which in turn can increase external lending burden measured in local currency.

Although the government is not inclined to debt restructuring, deteriorating indicators coupled with the lack of adequate foreign financing suggest that Pakistan will soon have to embark on this path. According to the Debt Bulletin, in dollars, Pakistan's total public debt stood at $233 billion in December, including $86.6 billion in external public debt. The country has to pay 28% of its debt in just one year, which is quite a large percentage and will expose the country to all kinds of debt risks. Domestic floating-rate debt is now Rs 22.5 trillion or 68% of domestic debt, which is toxic given that interest rates are at an all-time high of 20%.

In terms of rupees, government debt skyrocketed to Rs 52.7 trillion – an additional Rs 3.6 trillion in the first half of the financial year. Rupee depreciation added 2.3 trillion rupees to public debt in six months, contributing to a 63% increase in debt over the period. Interest expenses amounted to Rs 2.27 trillion in the first half of the financial year, accounting for 72% of the increase in public debt during the period. Some of the increase was offset by the withdrawal of cash balances at the bank and a basic surplus.

The Ministry of Finance said it was important to curb foreign debt risk to manage currency risk. "The rupiah's depreciation over the past four years against international currencies has resulted in a higher value of external debt when converted to local currency."The report also shows that the average maturity of domestic loans has fallen from four years to three and a half years in one year. This is also riskier and will prevent the country from depending on commercial banks to exploit the situation.

"Given the current interest rate environment, domestic debt demand remains largely skewed towards short- and medium-term government bonds," the report said. The average maturity of external debt has also fallen from an already low level of six years and seven months to just six years and three months. It is even lower than the minimum threshold, leading to the risk of refinancing leaving the country subject to the domination of foreign creditors. Finance Minister Ishaq Dar said on Friday that the country should learn to live with or without the IMF - a comment that has caused confusion over the government's intentions to reinstate a six-month bailout. $0.5 billion has been derailed.

The Ministry of Finance said that short-term loans from foreign commercial banks and deposits from friendly countries have reduced the average maturity of foreign debt. The Average Time To Revalue (ATR) of domestic debt also fell to one year and seven months at the end of December 2022, from one year nine months a year earlier, according to the report. This decrease in ATR is due to strong market demand for floating-rate debt instruments due to the prevailing interest rate environment, he added.

ATR reduction means that the Treasury must keep interest rates unchanged on outstanding debt, leaving the government vulnerable to rate hikes. In addition, the ATR of external debt also decreased to 5 years 3 months at the end of December 2022 compared to 5 years 7 months a year ago due to a higher proportion of foreign debt flows at floating interest rates, flowing from the current fixed rate of foreign debt. debt portfolio; and a higher proportion of fixed-rate foreign debt maturing in the short and medium term, he added. In another significant deterioration, fixed-rate debt fell from 26% to just 22.6% domestic debt, increasing interest rate risk. This comes at a time when the central bank will suddenly raise interest rates.

A total of Rs 17.1 trillion or 52% of government debt is held by commercial banks, which are now a source of exploitation and despite exchange rate manipulation, the government seems unable to apply. sanctions against some of these banks. About 15 trillion rupees, or 28% of total debt, will mature in a year and need to be refinanced. This includes part of the external debt. Variable interest rate domestic debt increased from 62% to 68%. Of the Rs 33.1 trillion worth of domestic debt as of December 2022, Rs 22.6 trillion is borrowed at a floating rate.

Inflation spiked to 35.6% in March and variable interest rates would also significantly increase the cost of repaying already overwhelming debt. The only positive indicator is that the share of Shariah-compliant debt in public securities has increased from 6.4% to 9.2% in the last calendar year.

Published by Kamu Aly