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The SBP has released the data on the level of gross government debt as of the end of November 2021. It stands at Rs 40,973 billion. The likely level of deposits with the banking system is close to Rs 3,100 billion. Therefore, the net Government debt is Rs 37,873 billion, equivalent to 75.3 percent. When the PTI assumed power, it was 66.5 percent.

The Fiscal Responsibility and Debt Limitation Act of 2005 had set the upper limit of 60 percent on net Government debt as percentage of GDP. This limit has been continuously violated since 2015-16. The Act requires the Government to present a plan to bring down the debt to GDP ratio to below 60 percent. But this has seldom been the case.

The absolute increase in debt in the five-month period from June to November 2021 is large at Rs 2274 billion. When compared with the stock of debt in November 2020, it is bigger by as much as Rs 5,149 billion.

There is need to understand the reasons for the big increase in Government debt in the first five months of 2021-22. Is it due to a large underlying fiscal deficit or is it higher because of the increase in the rupee value of external debt due to faster depreciation of the rupee?

Between June and November 2021, the fall in the exchange rate was as much as Rs 18.83 per dollar. The level of external debt of the Government at the end of November was just above $80 billion. Therefore, the larger part, of above 60 percent, is due to the devaluation.

There have also been big changes in the composition of gross Government debt during the first five months. The share of domestic debt has fallen from 67.9 percent in June 2021 to 65.5 percent by November. The increase in the share of external debt is due largely to the depreciation of the rupee. In dollar terms, the debt has increased marginally from $79 billion to $80.3 billion in five months.

Within domestic debt, there have also been significant changes as shown in Table 1. The share of permanent (long-term) debt has gone up by 4 percentage points with the same decline in the share of floating debt.

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Table 1
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Composition of Domestic Debt
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                                                             (% share)
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                                      June 2021          November 2021
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Permanent Debt                          60.5                      64.7
Unfunded Debt                           13.9                      13.5
Floating (Short Term) Debt              25.5                      21.6
======================================================================
Total                                  100.0                     100.0
======================================================================

This has happened during a period of relatively high inflation. Consequently, yields on long-term bonds have been high and this has created a ‘lock-in’ effect, whereby there is an increase in the cost of debt servicing on a sustained basis.

However, this effect may be limited for a special reason. The Government has taken a large loan directly from the SBP against the SDRs issued by the IMF of Rs 475 billion. This was timed in such a way that it has happened before the prohibition of direct borrowing by the Government from the SBP under the amended SBP Act. Interest paid annually on this borrowing will flow back to the Government in the form of SBP profits.

The Government is also making a transition from the conventional Pakistan Investment Bonds (PIBs) to Ijara Sukuk Bonds. Rs 565 billion is the flotation of the latter type of bonds as compared to Rs 490 billion of the former type of bonds. The Ijara Sukuk Bonds have a maturity period of 3 years. However, these bonds retain the characteristics of fixed coupon bonds.

There is need to question why the National Savings Schemes are being neglected by the Government. Since November 2020, the stock of unfunded debt has declined by Rs 48 billion. Prize bonds now require registration of purchase to reduce the component of tax evasion. However, other schemes need to be promoted which are subject to the normal fixed income tax.

There is need to restore the importance of the Special Savings Certificates especially following the Amendment in the SBP Act. These instruments enable direct access to the secondary market of households. This will provide some counter to the increase in the market power of commercial banks in the Government bond and treasury bill market following the restriction placed on direct borrowing from the SBP.

The federal budget deficit has been derived for the period, June to November 2021, as the increase in debt less the rise in the rupee value of external debt due to exchange rate depreciation. It is estimated thereby at1.8 percent of the GDP. This is significantly lower than the deficit in the corresponding period of last year. The Government appears to be managing well the public finances. This has been facilitated by the extremely fast growth in FBR revenues and a restricted level of development spending.

The outlook for the growth in the size of the Federal Government debt will hinge crucially on the rate of depreciation of the rupee in coming months, sustainability in the high growth of FBR revenues, magnitude of loss of revenues from the Petroleum Levy and on the level of SBP profits, as per the new formula. We hope that the overall budget deficit target of 6.3 percent of the GDP will not be exceeded in 2021-22.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2022

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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