Public debt rises to Rs39.77 trillion in July-Aug

KARACHI: Public debt rose 2.8 percent in the first two months of the current fiscal year as the government borrowed heavily to bridge the fiscal deficit, the central bank data showed on Tuesday, but analysts warn a rise in debt costs as inflation picked up.

Public debt stood at Rs39.77 trillion by the end of August. It amounted to Rs38.697 trillion in June. The debt increased 11.52 percent year-on-year. It was Rs35.660 trillion at the end of August 2020.

The country’s public debt continued to rise due to the financing of the budget deficit, depreciation in the exchange rate, higher interest payments, Covid-related economic stimulus package and social safety programmes.

Funding requirement of the budget deficit is mainly met through the domestic market and within the domestic sources, a large portion of the financing is mobilised through long-term government securities, especially when there is zero borrowing from the State Bank of Pakistan.

The external debt originated from multilateral and commercial creditors.

Domestic debt inched up 0.26 percent to Rs26.334 trillion at the end of August. It comprised of the government securities, mostly held by commercial banks, and non-bank debt, such as National Saving Schemes, including prize bonds.

A recent increase in the policy rate will elevate the government's cost of debt.

“Given the price level and commodity super-spike, the interest rates hike is inevitable. This will have a negative bearing on debt servicing,” said Muzammil Aslam, CEO at Tangent Capital.

The debt accumulated via long-term instruments slightly fell to Rs19.041 trillion from Rs19.556 trillion, while the short-term debt rose to Rs7.238 trillion from Rs6.680 trillion, highlighting the government’s increasing reliance on short-term loans.

Long-term debt is sourced by Pakistan Investment Bonds, while short-tenor comes from Market Treasury Bills.

“Rising interest rates will result in a higher cost of borrowing for the government. It is believed, one percent increase in interest rate results in approximately Rs90-100 billion incremental debt servicing,” said Tahir Abbas, the head of research at Arif Habib Limited.

External debt increased 8 percent to Rs13.435 trillion as of August 31, 2021, because of a sharp fall in the domestic currency and a higher current account deficit. It also shows an increase in loans from multilateral, bilateral and commercial sources, and from international capital markets such as Eurobonds.

The government in its annual debt review and public debt bulletin for FY2021 said it remained within the stated benchmarks of risk indicators during the fiscal year 2020-21. However, few annual targets set the last year with respect to debt risk indicators were slightly missed mainly due to the higher than envisaged federal fiscal deficit, lower than planned issuance of Sukuks amid unavailability of assets, non-materialisation of envisaged privatisation proceeds, and the need to build the cash-buffer in anticipation of upcoming maturities.

“Pakistan is availing the G-20 Debt Service Suspension Initiative (DSSI) for a period of 20 months (May 2020 - December 2021) which will help to defer the debt servicing to the tune of around $3.7 billion during this period,” it added.