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LAHORE: The Punjab government’s liability, constituting both domestic and external debts, witnessed a decrease of Rs 0.2 billion in the second quarter of the ongoing fiscal year (2023-24), which is a slight dip of 0.01 percent in three months.

As per a report released by the Punjab Finance Ministry for the period between October 1, 2023, and December 30, 2023, on Tuesday, Punjab’s debt stock slightly declined from Rs 1704.7 billion (reported in September 2023) to Rs 1704.5 billion. The domestic loans showed a decline from Rs 2.4 billion (reported in September 2023) to Rs 2.1 billion whereas external loans witnessed a slight gain from Rs 1,702.3 billion (reported in September 2023) to Rs 1,702.4 billion. These loans collectively were 2.97 percent of Punjab’s GSDP (Gross State Domestic Product).

Citing the reason for the increase in the loans, the report observed that this decrease is on account of a reduction in net debt position witnessing a foreign exchange gain of around Rs 13.9 billion during the second quarter of FY 2023-24.

It noted that the outstanding dues in December 2023 were exclusive of provincial guarantees (awarded to various Punjab government entities) and commodity debt. The outstanding commodity debt stood at Rs 450 billion at the end of December 2023, which was secured by wheat stock procured by the government for commodity operation along with a guarantee in the form of a Cash Credit Limit (CCL) by the Federal government.

The debt portfolio predominantly comprises borrowing from external sources with 99.9 percent coming from multilateral agencies and bilateral loans contracted on concessional terms (low cost and longer tenor), procured mainly for infrastructure development and reform support, whereas only 0.1 percent of the debt portfolio is domestically borrowed from the Federal government, the report stated.

The report highlighted that the government’s external debt is derived mainly from three key sources, with around 53 percent coming from the World Bank (the International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD), 22 percent from China and 21 from Asian Development Bank, and 4 percent from other sources.

As per the report, the agriculture, irrigation and livestock sector remained the major recipient of government borrowing, as its share constitutes 26 percent of the total outstanding followed by transport and communication 23 percent, education 20 percent, urban and community development 13 percent, governance 9 percent, health 5 percent and others 4 percent.

Moreover, it pointed out that the government’s debt portfolio is dominated by foreign currency borrowings, with total exposure residing at 99.9 percent of outstanding debt. Currency-wise exposure is denominated in American dollar (71 percent) followed by Special Drawing Rights (21 percent), Japanese Yen (5 percent), Chinese Yuan (2.6 percent) and other currencies (0.7 percent). Hence, the report noted, the government’s debt by its composition remains exposed to foreign exchange risk; owing to this, any change in parity of the dollar and other foreign currencies with the rupee has a pronounced impact on the valuation of Punjab’s debt portfolio when translated into rupee terms.

The report also noted that overall, a significant portion (74 percent) of the debt portfolio comprises loans contracted on fixed interest rates and is not exposed to changes in international interest rates. However, the floating rate portion (26 percent) remains subject to periodic revision of interest rates since these loans attract floating reference rates (i.e. SOFR, TONA, EURIBOR, etc.). Given the increasing interest rate environment internationally coupled with the depreciation of the rupee against foreign currencies, debt servicing in rupee terms is witnessing higher requirements as a percentage of revenue for the province.

Copyright Business Recorder, 2024

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