Floating debt becoming indispensable

As sources of external financing thinned and sputtered, the cash-starved government pinned hopes on domestic sources during the current fiscal year. To plug the countrys budget gap, the borrowing burden on the countrys frail shoulders increased by net Rs.1,315 billion during the first nine months of the current fiscal year to a total of Rs.12,024 billion at the end of March 2012. The domestic currency debt portfolio increased by Rs.1,191 billion during the first nine months of the current fiscal year to Rs.7,206 billion at the end of March 2012. By comparison, the foreign currency debt pool expanded by meager Rs.124 billion to Rs.4,818 billion at the end of March 2012. As domestic lenders stayed generous, the share of domestic currency debt glided 3.8 percentage points higher during the period under consideration to 60 percent at the end of March 2012. The countrys public debt as a percentage of GDP stood around 58.2 percent at the end of March 2012, slightly below the average ratio of around 59.7 percent during the past five years. Similarly, public debt stood at 4.1 times government revenues at the end of March 2012, as opposed to 4.7 times at the end of the last fiscal year. The Economic Survey of Pakistan prescribed the ideal debt to revenue ratio of around 3.5 times or lower. During the past ten years, there has been an apparent shift in domestic debt mix towards floating rate instruments from unfunded sources. With financial institutions scrambling for investments in risk-free instruments, the funding from floating rate instruments now accounts for just over half (54 percent) of the total domestic currency debt ( March-end, 2012-close), to the level at the end of the last fiscal year. Currently, the scheduled banks alone are holding 75 percent of total outstanding Treasury bill on their books. With the government leaning on funding from floating rate instruments, the borrowing portfolios reinvestment and roll over risk have considerably increased. "Failure to issue new debt in order to mature a large amount of outstanding short-term debt may trigger a liquidity or debt rollover crisis. The increase in frequency of such operations (due to their short-term nature) coupled with any adverse rise in interest rates may leave the government vulnerable to high cost of debt", notes the recently released, Economic Survey of Pakistan. The contribution of funding from unfunded resources sank into despair; down by 3.6 percentage points during the first nine months of the current fiscal year to 24 percent at the end of March, 2012. The size of savings fund schemes, main contributors in the unfunded debt category, expanded (net) by a relatively trivial Rs.66 billion during the first nine months of FY12 to Rs.1,610 billion at the end of March 2012. Inflows from permanent funding sources made headway, with its composition increasing by around 3 percentage points to 22 percent during the period under review. Inflows in Pakistan Investment Bond (PIB), Ijara Sukuk and prize bonds contributed towards growth in permanent debt.