The Federal Government is planning to develop domestic debt capital markets to ensure raising long-term domestic debt at competitive pricing.
This has been stated in the Fiscal Risks Statement 2023-24 issued by the Ministry of Finance. The report states that the Finance Division is committed to working closely with the SBP and SECP to develop domestic debt capital markets and increase the participation of other entities such as insurance companies and pension funds.
The share of a fixed rate in domestic debt was 26 percent and around 70 percent in external debt.
The report stated that the total Public Debt of the Government has exceeded the prescribed limit of 60 percent of GDP over the last five years under the FRDL Act. This is primarily due to consistent fiscal deficits, averaging 6 percent of GDP since 2010, which have led to a rapid build-up of debt.
TPD can increase due to both budgetary and non-budgetary factors, such as unfavorable movements in interest and exchange rates and the realization of contingent liabilities.
External debt constitutes 40.8 percent of total public debt, which may make the Government’s fiscal position vulnerable in the face of high current account deficits, low foreign exchange reserves, and a weakening exchange rate.
A lack of foreign exchange reserves coupled with large external payments has resulted in liquidity issues and destabilized the exchange rate and domestic interest rates, further increasing the burden of external loans that are measured in local currency.
Ongoing fiscal deficits require refinancing of the Government’s maturing debt while raising additional debt to fulfill the fiscal shortfall. A high level of short-term debt creates potentially significant refinancing challenges during periods of slower economic growth, higher fiscal deficits, and/or lower investor confidence.
To manage the refinancing risk, it is important for the government to achieve and maintain a longer average time to maturity (ATM) of its domestic as well as external debt. This means that the government should issue debt with longer maturities, which will reduce the frequency of debt rollovers and decrease the refinancing risk, in line with the current Medium Term Debt Strategy.
The Finance Division sets the target for domestic debt at 4 years ATM and 7 years ATM for external debt with GFN/GDP at 27 percent in its Medium Term Debt Strategy 2019-2023.
For FY2022, the ATM of Domestic Debt was reported at 3.6 years, falling short of the targeted ATM of 4 years. However, the government is determined to implement stronger fiscal discipline, decrease its fiscal deficit, reduce its borrowing requirements, and rely on longer-term instruments for domestic borrowing. These actions are expected to meet its targets.
In FY2022, the ATM of external debt was recorded at 6.2 years, below the target of 7 years.
The government has borrowed significant amounts in recent years by utilizing commercial sources such as medium to long-term Eurobonds and short-term bank loans resulting in a decline in ATM of external debt. Furthermore, the GFN/GDP for FY2022 stood at 26 percent of GDP, better than the targeted 27 percent.
Another source of fiscal risk is reflected in Pakistan’s exposure to floating debt, making it vulnerable to an increase in borrowing rates that may arise due to unfavorable economic conditions. Maintaining a significant proportion of fixed-rate debt within both domestic and
external debt is crucial for managing interest rate risk, as it safeguards the borrower against sudden increases in borrowing rates in response to unfavorable economic circumstances.
The share of a fixed rate in domestic debt was 26 percent and around 70 percent in external debt.
Moreover, steps will be taken to reduce the fiscal deficit and implement policies aimed at achieving price stability and reducing long-term inflation expectations.
These initiatives will enhance the efficiency of financial markets in resource allocation, boost demand for long-term fixed-rate government securities, and enable the government to establish and achieve more ambitious targets for fixed-rate government securities.
