Pakistan hedges foreign loans repayment

ISLAMABAD: Pakistan has hedged its short term repayments obligations on foreign loans obtained in Euro and Yen to the tune of around $2 billion till end June 2018 in order to mitigate the risk arising out from fluctuation of currencies in international market, The News has learnt.

“Yes, we have hedged our short term obligations in Japanese Yen and Euro around $2 billion keeping in view strengthening of US Dollar against other currencies so it resulted into saving substantial amounts,” one top official of Finance Division told The News.

The government is going to make this disclosure before the Parliament as it will be submitting its detailed report titled ‘Debt Policy Statement’ on January 31.

The Debt Office, Ministry of Finance, has prepared its report and submitted to Finance Minister Ishaq Dar for seeking final approval before its publication and submission to the elected House. The Finance Ministry is bound to table latest position on total loans under Fiscal Responsibility and Debt Limitation Act (FRDLA).

“Pakistan’s foreign loan to the tune of $4.8 billion is in shape of Yen and Euro and the government hedged its repayment obligations close to $2 billion till end June 2018 keeping in view of strengthened US Dollar in international market against all other major currencies of the world.

We have so far saved substantial amount in last few months,” top official sources in the Ministry of Finance told The News in background discussions.

The Debt Office of the Ministry of Finance confirms this development but its officials are not willing to talk to this scribe on record arguing that they were not authorised to talk with the media. One top official said it was part of overall debt management strategy to reduce the debt burden. With approval of the government, he said, different avenues were used, including hedging some portion of loans in order to achieving savings which otherwise might have consumed substantial amount for repayment obligation.

The hedging of loan is used to avoid maximising debt burden because of fluctuation of international currencies under which the obligation is fixed at certain level for certain period. It also possess certain costs but last few months showed that Pakistan had saved amount because of hedging and further strengthening of US dollar against Yen and Euro would increase savings in months ahead.

A top official said Pakistan secured its position by moving ahead with hedging of one portion of foreign loans after witnessing fluctuation in major currencies and saved millions of dollars. The US Dollar had gained strength in last few months against Yen and Euro after which the government hedged its loans obtained in Yen and Euro, otherwise its obligations might have gone up by few billion dollars.

The Ministry of Finance in its latest Medium Term Debt Strategy (MTDS) report stated that around 28 percent of total public debt stock was denominated in foreign currency which is a source of exchange rate risk. Currency-wise composition of public debt stock showed that out of total public debt, 71.7 percent lies in Pakistani currency, 10 percent in US Dollar, 8.7 percent in special drawing rights (SDR) from the IMF, 5.1 percent in Japanese Yen, 2.4 percent in Euro and 1.5 percent in other currencies.

Within external debt and adjusted for SDR, around 91 percent of total external public debt is contracted in 3 major currencies i.e. main exposure of exchange rate risk comes from USD denominated loans (52 percent of total external debt), followed by Japanese Yen (20 percent) and Euro (19 percent). The share of external loans maturing within one year was equal to around 28 percent of official liquid reserves at the end of 2014-15 as compared with around 69 percent at the end of 2012-13 indicating improvement in foreign exchange stability and repayment capacity. 

Currently, two different definitions of total public debt are being used by the Ministry of Finance and State Bank of Pakistan (SBP). According to the SBP definition, total public debt and liabilities stood at Rs23,389.6 billion till end September 2016 while the Finance Ministry showed that the figure of public debt was hovering around Rs20, 542.8 billion.

Another top official said the Brexit developments and US Dollar strength had forced the government to make this bold decision of moving ahead with hedging as earlier the weakening of dollar against other currencies in past few years had benefited the country on account of foreign loans to the tune of $3 to $4 billion dollars. After reversal of US Dollar where it got strengthened it was dire need of the time to make adjustments in economic decision making process.

Meanwhile, Finance Minister Senator Ishaq Dar chaired a meeting on debt management here at the Ministry of Finance on Saturday.

Director General Debt gave a detailed briefing to the finance minister on debt management. He apprised the minister of the reforms that have been undertaken in the Debt Policy Coordination Office during the past three years. He said that adoption of latest technology and methods has led to more efficiency and transparency in debt management.

Ishaq Dar said the sustainability profile of public debt has improved significantly during the present government. He said that this fact has been acknowledged by international credit rating agencies in the form credit rating upgrades for Pakistan. He appreciated the efforts of the Debt Policy Coordination Office and urged further improvement in debt management through adoption of best international practices and standards. He advised Finance Division, Economic Affairs Division and the State Bank to ensure close coordination amongst each other in order to achieve further efficiency in debt management.