The signs of debt sustainability get worse.
A report from the Ministry of Finance shows that the country’s external public debt has increased dramatically during the past six months.
ISLAMABAD:
In spite of sharp currency devaluations and rate increases, Pakistan’s key debt sustainability indicators showed a considerable decline in the first half of this fiscal year, according to the finance ministry’s semi-annual debt bulletin.
The July-December 2022 report revealed that while the average time to maturity and the period before interest rates reset both got shorter, the share of foreign public debt increased during the previous six months.
This occurs at the same time that interest rates are at record highs and the currency has depreciated by 56% since the current administration took office a year ago.
According to the research, the percentage of external debt in total public debt increased from 37% in June to 37.2% by December, increasing currency risks at the same time as the rupee was depreciating and foreign nations were reluctant to give loans. The debt office releases a semi-annual debt bulletin that includes details about debt operations, debt stocks, and the factors that affect those stocks.
High external payments after low foreign exchange reserves, the paper states, “may pose liquidity issues and potentially destabilize the exchange rate, which in turn, might increase the cost of external debts assessed in local currency.”
Although the government does not favor debt restructuring, deteriorating indications and a lack of sufficient foreign finance indicate that Pakistan will soon be forced down this road.
The debt bulletin states that as of December, Pakistan’s total public debt, including its $86.6 billion external public debt, was $233 billion in dollars. The nation must cover 28% of its debt in only one year, which is a significant portion and will subject the country to a variety of debt-related dangers.
With Rs22.5 trillion, or 68% of total domestic debt, variable rate debt is now hazardous due to historically high interest rates of 20%.
Public debt increased by Rs3.6 trillion over the first half of the fiscal year, or $52.7 trillion in rupees, to reach this level. In six months, the national debt increased by Rs2.3 trillion, or 63%, thanks to the depreciation of the rupee. For the first six months of the fiscal year, interest costs totaled Rs2.27 trillion, or 72% of the rise in state debt.
The withdrawal of the primary surplus and bank cash balances somewhat negated some of the increases.
According to the finance ministry, limiting exposure to foreign debt is crucial for managing exchange rate risk. “The rupee’s decline versus other currencies over the past four years has increased the value of external debt when converted to local currency.”
The survey also shown a reduction in the average domestic loan maturity period from four years to three and a half years in just one year. This was also risky and would leave the nation dependent on foreign commercial banks looking to take advantage of the circumstance.
The research stated that given the current interest rate environment, short- to medium-term government securities continued to be in high demand for domestic debt.
The average duration of the external debt, which was already low at six years and seven months, decreased even further to just six years and three months. Even lower than the minimal requirement, it has left the nation at the mercy of foreign creditors due to refinancing concerns.
Ishaq Dar, the finance minister, stated on Friday that the nation should adapt to life with or without the IMF. This statement has raised questions about the government’s plans to resurrect the $6.5 billion bailout package.
According to the finance ministry, the average time to maturity of external debt decreased as a result of the short tenor of deposits from friendly nations and loans from foreign commercial banks.
According to the study, the domestic debt’s Average Time to Refix (ATR) decreased from one year and nine months in December 2021 to one year and seven months in December 2022. Due to the current interest rate environment, which caused a significant market desire for floating rate debt products, this fall in ATR was caused, it was added.
The government becomes more susceptible to interest rate increases when the ATR declines because the finance ministry must lower the interest rate on the stock of debt.
Additionally, the ATR of external debt decreased from five years and seven months last year to five years and three months by the end of December 2022 due to higher proportions of floating rate external debt inflows, which are depleting the portfolio of fixed rate external debt already in place, as well as higher proportions of fixed rate external debt maturing in the short- to medium-term.
Another notable deterioration was the reduction of fixed rate debt from 26% to just 22.6% of the domestic debt, which raised interest rate concerns. This coincides with the central bank’s impending sharp increase in interest rates.
Commercial banks hold Rs17.1 trillion, or 52%, of all government debt, making them a source of abuse. Despite exchange rate manipulation, the government doesn’t appear to be able to penalize some of these banks. In a year, around Rs15 trillion, or 28% of the entire debt, would expire and need to be refinanced. A percentage of the external debt is included in this.
Domestic debt with fluctuating interest rates now makes up 68% of the total. A total of Rs22.6 trillion of the Rs33.1 trillion in domestic debt as of December 2022 has been financed at floating interest rates.
Inflation reached a record high of 35.6% in March, and the percentage of floating-rate debt will further add to the already excessive cost of debt servicing.
The percentage of Shariah-compliant debt in government securities, which climbed from 6.4% to 9.2% in the past year, was the only positive sign.
