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ISLAMABAD: The Finance Ministry has maintained that the domestic and external borrowings during the period of the caretaker government have been relatively lower compared to the preceding period of the Pakistan Democratic Movement (PDM) government.

The Finance Ministry has drawn a comparison of the caretaker government’s period from 17th August 2023 to 31 January 2024 as opposed to the preceding period of the PDM government from 1st February 2023 to 16th August 2023 in terms of domestic debt, government securities, inflow and outflow, treasury bills, PIB, Sukuk, and external debt inflow and outflow.

The ministry added that the bulk of borrowing was raised in the last few months to meet the debt repayment obligations including principal and interest expense liabilities as the caretaker government focused primarily on fiscal consolidation measures including revenue mobilisation and expenditure rationalisation.

Jul-Nov borrowing down $0.829bn to $4.285bn YoY

The caretaker government inherited a policy rate of 22 percent, which is the highest ever since 1972. The average policy rate during the preceding period was almost 19.5 percent.

Over a short stint, with careful debt management operations, the caretaker government has managed to improve the domestic debt profile by: (i) extending the maturity of government securities; (ii) raising debt on margin below the policy rate; and (iii) tapping non-bank and retail investors through the capital market.

The focus was on reducing borrowings from government securities through the banking sector.

The caretaker government successfully retired short-term treasury bills amounting to Rs1.6 trillion, contrasting with around Rs3.3 trillion raised in the preceding period.

This has helped in reducing the gross financing needs of the government. The borrowing through government securities fell by 67 percent in the caretaker government’s term as compared to the preceding period of the PDM government as the domestic debt inflow (government securities) during the preceding period was Rs19,862 billion and outflow (Rs14,031) billion with a net flow of Rs531 billion.

During the caretaker government, total domestic debt inflow (government securities) was Rs19,830 billion and outflow (Rs17,934) billion with a net-flow of Rs1,896 billion reflecting a decrease of 67 percent. The inflows of domestic debt are in realised value terms.

The inflow during the preceding period (treasury bills) was Rs15,985 billion, outflow (Rs12,678) billion with a net flow Rs3,307 billion while during the caretaker government inflow (T-bills) was Rs13,813 billion and outflow (Rs15,417) billion and net flow Rs1,604 billion.

The caretaker government shifted its domestic borrowing to long-term debt securities for the financing of fiscal deficit. Out of medium- to long-term instruments, major borrowing remained from floating rate securities, while fixed rates instruments were borrowed on average at three to four percent below the policy rate during the caretaker government period.

Resultantly, the average time to maturity of domestic debt has increased to around three years by the end Jan 2024 as compared to 2.8 years at the end of June 2023. This is inline with the targets mentioned in the Medium-Term Debt Management Strategy (MTDS) FY23-FY26 and a step in the right direction to meet the end June 2024 target of 3.1 years.

During the preceding period, PIB and Sukuk inflow was Rs3,877 billion, outflow (Rs1,353) billion with net flow Rs2,524 billion while during the caretaker government, PPIB Sukuk inflow was Rs5,017 billion, outflow (Rs2,517) billion and net flow Rs3,500 billion.

External borrowings at end June 2023, the share of external debt in total public debt was 38.3 percent which reduced to 36.7 percent at end December 2023. This helped to reduce the foreign currency risk of the total public debt in-line with the targets defined in the MTDS fiscal year 2023-26.

During the caretaker government, the net external debt inflows were around US$ 0.3 billion, which is lower as compared to the preceding period.

Furthermore, no expensive external borrowing was raised from commercial banks and international capital markets during the caretaker government.

External borrowing during the preceding period of the PDM government was $8.4 billion while outflow ($5.4) billion with net-flow $3 billion.

During the caretaker government, external debt inflow was $3.9 billion, outflow ($3.6) billion and net-flow $0.3 billion.

This includes IMF Budgetary and Balance of Payment (BoP) inflows and outflows, excluding grants and bilateral rollover, outflows represent principal only and do not include the UAE balance of payment deposit in July 2023.

Besides fiscal and external current account sustainability and privatizing state-owned companies, it is critical to pursue prudent debt management backed by reducing sovereign-bank nexus to avoid overburdening banks with public sector debt, while reducing private sector crowding out.

Copyright Business Recorder, 2024

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