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KARACHI: The federal government's domestic debt and liabilities continued to surge reaching Rs 24.64 trillion in November 2020 due to massive borrowing for financing of fiscal deficit.

The State Bank of Pakistan (SBP) Monday reported that the government's overall stocks of domestic debt and liabilities posted an increase of 3.2 percent in the first five months of this fiscal year (FY21).

Overall, stocks of domestic debt and liabilities surged to Rs 24.642 trillion in November 2020 compared to Rs 23.875 trillion in June 2020, depicting an increase of Rs 767 billion. Domestic debt and liabilities comprise permanent debt, floating debt, unfunded debt and foreign currency loans.

The detailed analysis revealed that in terms of instruments, permanent debt dominated the domestic debt accumulation. With an increase of Rs 1.406 trillion, permanent debt increased from Rs 14 trillion in June 2020 to Rs 15.429 trillion in November 2020.

However, no major activity was observed in other categories except for heavy retirements in floating debt instruments. The weak activity in National Saving Scheme (NSS) instruments stemmed primarily from limited operations of sales centers during lockdown and imposition of ban on institutional investments, a cut in profit rates and launch of registered bonds.

Floating debt instruments witnessed Rs 572 billion debts servicing during the July-Nov of FY21 and declined to Rs 5.006 trillion from Rs 5.578 trillion.

Similarly, during the period under review, unfunded debt stood at Rs 3.668 trillion, slightly down by Rs 4 billion to Rs 3.668 trillion. Unfunded debt includes national saving, postal life insurance and GP Fund. The government's total domestic liabilities decreased by Rs 60 billion to Rs 531 billion in November 2020 from Rs 592 billion in June 2020.

Analysts said that institution-wise breakup shows that most of the rise in government domestic debt was sourced from the banking system. Within the banking system, the entire mobilization came from scheduled banks as the government continued to retire the SBP debt during the quarter. Non-banks, especially insurance companies and non-financial corporate, provided for the remaining the government’s financing needs.

Analysts are expecting more growth in the domestic debt in coming days as government’s expenditures are increasing due to COVID-19.

The government increased its deposits with the banking system as part of its debt management strategy during FY20. These deposits helped the government smoothly manage its debt obligations as well as other expenditures during FY20. Nonetheless, the volume of deposit accumulation was much lower in FY21, which helped contain the domestic debt accumulation.

In addition, auction profile of government securities suggests that the government as well as the market participants were inclined towards long-term instrument, as evident by the offer and acceptance amount of floating rate PIBs. An important determinant for banks’ preference for long-term instruments over short-term instruments was the rise in the term premium for PIBs.

Copyright Business Recorder, 2021