Saturday, 20 September 2014
It is indeed a matter of concern that outstanding stock of public debt continues to rise, without any hope of reversal in its trend in the near future. According to the latest data released by the State Bank, Pakistan's gross domestic and foreign debt has jumped from Rs 14.160 trillion at the end of July, 2013 to Rs 15.807 trillion by the close of July, 2014, reflecting a rise of Rs 1.647 trillion or 11.63 percent over a period of 12 months. Both the domestic and foreign debt showed increases of varying degrees. While the domestic debt surged by 14.7 percent to Rs 10.946 trillion from Rs 9.538 trillion last year; foreign debt, mostly provided by Western donors and international financial institutions including the IMF, went up by 5.19 percent to Rs 4.861 trillion as against Rs 4.622 trillion at the end of July, 2013. The ratio of public debt to GDP, however, remained flat at around 64.3 percent but this percentage still breached the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005 that requires the government to take measures to reduce public debt and maintain it within prudent limits of 60 percent of the GDP. The government nonetheless, made a deliberate effort to shift short-term debt to long-term debt as it borrowed as much as Rs 2.023 trillion through PIBs in the last 12 months that took its overall borrowings through PIBs to Rs 3.163 trillion by end-July 2014 reducing a short-term floating debt by 13.4 percent to Rs 4.553 trillion in the same period. The shift of domestic debt from 12 months and less in the form of treasury bills to three, five and 10 years tenors may raise the government's cost of PIBs Rs 40 billion due to the increase in PIB cut-off rate which was badly managed. The growing gap between the rates on T-bills and PIBs has increased from a historical one percent to two and half percent. As a consequence, there is now a complete disconnect between inflationary expectations and the SBP's discount rate; rendering monetary policy less relevant. Banks are no more lending to SMEs and are also shying away from consumer products. If the current situation persists, banks may well shy away from corporate as well. In case this happens, the productive sector of the economy would suffer with disastrous consequences.