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LAHORE: With interest payment of Rs 18 billion and principal repayment of Rs 64.4 billion, Punjab debt service estimates for FY 2022-23 was Rs 82.4 billion.

As per budget document made available to the Business Recorder, Punjab’s ratio of debt service to average revenue is 4.6% for FY 2022-23 which is not high and indicates low risk. A number of indicators are used to monitor and control risks associated with the government’s debt risk indicators act as a guideline to devise future borrowing strategies.

Highlighting the risk indicators, financial experts told this scribe that refinancing/rollover risk refers to the risk of being either unable to raise new debt to repay the portion of existing debt that is maturing, or to raise such debt at a much higher cost. Debt maturing in a year and average time to maturity (ATM) are two indicators used to measure this risk. ATM means the average time to retirement of the entire debt stock, they said.

They added that the interest rate risk refers to the exposure of debt portfolio to changes in the interest rate. Proportion of fixed rate debt, ATR and share of debt stock exposed to interest rate re-fixing in one year are the key indicators. Fixed rate debt is considered less risky as it is not exposed to interest rate fluctuations during its life.

On the other hand, external debt outstanding on 30 June, 2022, has an average borrowing cost of 1.57% and average maturity of 8.4 years. External debt of the government is denominated mainly in US dollar (72%), followed by special drawing rights (18%), Japanese Yen (6%) and other currencies (4%).

External debt of the government comprises mainly of concessional, long-term, foreign currency-denominated loans obtained from multilateral creditors such as World Bank and Asian Development Bank. These loans are borrowed by the federal government and on-lent to the Punjab government. These loans can be broadly classified as project loans and programme loans. Project loans are long-term loans meant for public investments in infrastructure whereas programme loans are medium-term loans meant for budgetary support and are typically linked with certain legal or policy reforms.

It may be noted that the redemption profile refers to the projections of annual principal repayments according to the repayment schedules of underlying loans. It helps identify periods in which large principal repayments will be due so that appropriate measures can be taken to address with such challenges. The redemption profile of Punjab’s debt is quite smooth and is spread over a period of 36 years.

Copyright Business Recorder, 2022

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