Public Debt

8

Recent developments with regard to the sovereign debt situation of countries ranging from Iceland to the United Arab Emirates, and more recently, of countries in the Euro‐zone, most prominently Greece, have been a rude awakening for global financial markets. After a protracted period of benign neglect, policymakers as well as investors are beginning to scrutinize more carefully the health of sovereign public finances. Lessons from previous debt crises are being re‐learnt. Escalating public debt does not bode well for macro‐economic stability and growth as it exerts upward pressure on interest rates and crowds‐out domestic private investment. For developing countries, the higher interest cost associated with domestic debt places a substantial strain on budgetary resources, with a negative spill‐over effect on social sector and development outlays and a slowdown in growth momentum. For external debt, creditors may charge a lower interest rate (as is the case with most multilateral and bilateral donors), but the exchange rate risk inherent in the accumulation of foreign currency debt leaves a country vulnerable to developments on the external account and in international markets. Therefore, policymakers are faced with choices not only of what levels of public debt to accumulate, but also the composition of the portfolio with regards to source, availability, costs and risks which are consistent with the government’s medium‐term fiscal, monetary, and exchange (external account) priorities.
Fig-8.1: Emerging Market Countries: Gross Government Debt, 2010 ( in % of GDP) Pakistan
70 60 50 40 30 20 10 0 Mexico South Africa Indonesia Pakistan Belarus Croatia Argentina Emerging LAC Emerging Asia Colombia Romania Emerging EUR Bulgaria Ukraine Saudi Arabia Poland Hungary Malaysia Thailand Russia Turkey China Brazil India Chile Peru

90 80

EMC Average

Source: IMF WEO Database

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In the aftermath of the global financial crisis and economic slowdown, most countries have acquired

Economic Survey 2009‐10

substantial amounts of debt as a result of large budgetary outlays and fiscal stimulus targeted at addressing the hardest hit economic sectors, instilling confidence in markets, and reviving overall economic activity. By augmenting already high levels of post‐crisis public debt, most countries now face a daunting challenge in dealing with increased debt burdens. The problem is more pronounced in developed countries, specifically in the Euro zone. Fiscal deficits in advanced economies have increased to approximately 9 percent of GDP1. Debt‐to‐GDP ratios in these economies are expected to exceed 100 percent of GDP in 2014 based on current policies, some 35 percentage points of GDP1 higher than before the crisis. By contrast, the public debt accumulation in emerging economies has been lower, with public debt ratios of approximately 30 to 40 percent of GDP in these economies (See Fig‐8.1). Given the higher economic growth in emerging economies led by strong domestic demand, there is ample fiscal space to place the debt burdens on a declining path with relative ease. Although somewhat insulated from the financial crisis, Pakistan too has witnessed a rise in public debt in the recent past. Fiscal profligacy in the shape of large subsidies, policy inaction with regards to rising oil prices in 2007, weak revenue collection, pressure on budgetary resources placed by a heightened security situation, and efforts to eliminate the inter‐corporate debt in the energy sector, have led to a relatively rapid increase in public debt. The cumulative effect of the depreciation of the Rupee against the US dollar, on the one hand, and the weakness of the US dollar against third currencies (including Special Drawing Rights, SDR) in which a significant portion of Pakistan’s external public debt is denominated, have also played a substantial part in the overall increase. Based on projections for the end of FY10, Pakistan has one of the highest public debt‐to‐GDP ratio amongst emerging economies (as shown in Fig‐8.1). However, policy responses in FY10, a withdrawal of pressure on the external account and a relatively stable exchange rate, in addition to a limit on borrowing from the central bank have all helped stem the rapid increase of public debt witnessed in FY09. 8.1‐1 Outstanding Public Debt The definition of public debt used in the Economic Survey of Pakistan is in conformity with international conventions. Total Public Debt (TPD) includes domestic debt payable in Pak Rupee as well as the short, medium and long term Public Debt portion of External Debt & Liabilities (expressed in Rupee term). In addition, funds obtained from International Monetary Fund (IMF) for the purpose of budgetary financing have also been included from the current fiscal year. The stock of public debt does not include the debt and liabilities of the central bank, which includes financing for balance of payment (BoP) support. Further, publically guaranteed debt and government guarantees issued for commodity operations are also not included. Using this standard definition, Total Public Debt (TPD) posted a growth of 12.2 percent during the first nine months of the current fiscal year and reached Rs. 8,160 billion at the end of March 2010. This increase in the stock of public debt is significantly lower than the rapid increase of 22 percent in the previous fiscal year. The domestic currency component increased by Rs. 631 billion or 16.3 percent to end at Rs. 4,491 billion in comparison to Rs. 3,860 billion of end‐June 2009. This increase accounted for 71 percent of the aggregate increase in TPD. On the other hand, there was an addition of Rs. 253 billion in the stock of
1

World Economic Outlook, April 2010, International Monetary Fund

110

Public c Debt

foreign cu urrency debt which makes s up the rema aining 29 perc cent. It is inte eresting to no ote that in con ntrast to FY09, t increase in the stock of TPD during the current year has m the mostly been through dom mestic sources. A A relatively st table exchang ge rate, appre eciation of the dollar again nst other maj jor currencies s, and limited ac ccess to mult tilateral and bilateral deb creating flo has nece bt ows essitated this shift in fina s ancing mix. Publi ic debt is incr reasingly com mposed of domestic currency debt, the e share of wh hich has risen from 53 percen nt as of end‐Ju une 2009 to 5 55 percent in March 2010. .
Table 8.1: Public Debt Domestic C Currency Debt Foreign Cu urrency Debt Total Publi ic Debt Domestic C Currency Debt Foreign Cu urrency Debt Total Publi ic Debt Domestic C Currency Debt Foreign Cu urrency Debt Total Publi ic Debt Domestic C Currency Debt Foreign Cu urrency Debt Memo: Foreign Cu urrency Debt (in US$ Billion) Exchange R Rate (Rs./US$, E.O.P) GDP (in Rs. Billion) Total Revenue (in Rs. Billion) * As of end d‐March, 2010 FY05 2178 1856 4034 33.5 5 28.5 5 62.1 1 242 2 206 6 448 8 54.0 0 46.0 0 31.1 1 59.7 7 6500 900 0 FY07 FY08 (In billion ns of Rs.) 2337 2610 3275 1973 2140 2705 4310 4750 5980 (In percen nt of GDP) 30.7 30.1 32.0 25.9 24.7 26.4 56.5 54.8 58.4 (In percent o of Revenue) 217 201 218 183 165 180 400 366 399 (In percent o of Total Debt) 54.2 54.9 54.8 45.8 45.1 45.2 FY06 FY09 3860 3417 7277 30.3 26.8 57.1 209 185 393 53.0 47.0 FY Y10* 4491 4 3669 3 8160 8 30.6 3 25.0 2 55.6 5 208 2 170 379 3 55.0 5 45.0 4

32.8 35.3 40.2 42.2 43.5 4 60.2 60.6 67.3 81.0 84.4 8 7623 8673 10243 12739 14 4668 1077 1298 1499 1851 2155 2 Source: EAD D, Budget Wing g, MoF and DPCO staff calcul lations

The drying up of exter rnal funding sources has put a halt to the rapidly i increasing expansion in fo oreign debt. As most of the foreign curr rency loans a project b are based, limited capacity to deliver on these d o projects has resulted in unutilized lending pi ipelines of e existing comm mitments. Th has made the his e disbursem ments under the IMF SBA program mo visible du A ore uring the first three quart t ters of 2009‐ ‐10. It should be e noted here that only a p portion of the e last two tran nches (US$ 1, ,083 million) has been use ed for budgetary y financing an nd hence, con nstitutes a pa art of the fore eign currency y component of TPD. While the remaining funds received from IM are reflect on the ba g MF ted alance sheet of the centr bank (SBP and ral P) hence, do not come under the am of public external de The SBA has primarily been secur to o u mbit c ebt. y red support t Balance of Payments position by supplement the s y ting the fore eign exchange reserves o the of country. e total increa ase in TPD, Rs s. 148 billion or 17 Out of the percent i attributed to depreci is d iation of na ational currency against the U United States s Dollar durin ng July 2009‐Mar rch 2010 as P PKR lost 4.2 p percent of its value during thi is period. This impact of depreciation o on the public deb bt stock has b been muted in the current t fiscal
Table 8.2: Translatio onal Impact on P Public Debt, FY1 10 Curr rency Rs. Bi illion PKR vs. Dollar 14 48 Dolla ar vs. Third Curre encies ‐9. .3 Net Impact 138 8.7 * As of end‐March 2 2010 Source: DP PCO staff calcula ations

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Economic Survey 2009‐10

year as opposed to 20 percent depreciation of the domestic currency in 2008‐09. However, appreciation of the dollar against major international currencies caused a translational gain (reduction in stock due to exchange rate movement) of US$ 111 million or Rs 9.3 billion in the outstanding stock of foreign currency public debt. The net impact of currency movements on TPD for the first three quarters of FY10 stood at Rs 138.7 billion. Fig 8.2 depicts the net impact of translational losses on account of Rupee depreciation against the dollar, and movements of the dollar against other international currencies from FY00‐FY10. On a cumulative basis, exchange rate losses amount to Rs 1605 billion or 20 percent of the current outstanding stock of TPD2. Losses during FY08 and FY09 were significantly higher, owing to a combination of a loss in value of the Rupee, as well as a weakening dollar in international markets. Fig‐8.2: Net Translational Impact on Total Public Debt FY00‐FY10*
600 500 Rs. Billion 400 300 200 100 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 * : As of end‐March 2010 Source: DPCO Staff Calculation Cumulative Losses FY00‐FY10: Rs. 1605 billion

The quantum of increase on the domestic front in the first nine months of 2009‐10 is nevertheless alarming. The resurgence of SBP borrowing in the last two months of the third quarter has been the principal source. However, with the government’s commitment to adhere to net zero quarterly borrowing limits, this rising trend in the stock of central bank debt is expected to stabilize by the end of this fiscal year. The shortfall in undisbursed amounts of foreign currency debt was met by a heavy reliance on domestic bank and non‐bank sources. The government was able to access the debt capital markets due to favourable current environment and interest rates. As a result, healthy investment in government securities and sizeable accruals in major NSS instruments accounted for much of the increase in Rupee debt. 8.1‐2 Servicing of Public Debt Servicing on public debt has aggregated to Rs. 640.2 billion at end‐March 2010. As percent of the projected GDP for 2009‐10, the public debt servicing is now 4.4 percent. Interest payments of Rs. 428.5 billion have been incurred on domestic debt, whereas Rs. 45 billion of the payment was on account of foreign debt. Huge repayments of about Rs. 166.7 billion were made to retire the maturing foreign currency debt. Almost 46 percent of the government revenues have been used to service interest and principal payments on public debt during July 2009 to March 2010.
2

Note: Due to unavailability of detailed data the currency composition is assumed to be constant for years before 2007.

112

Public Debt
Fig‐8.3: Public Debt Service as % of Total Revenue FY05‐FY10* 50% 40% 30% 20% 10% 0% FY05 FY06 FY07 FY08 FY09 FY10

* : As of end March 2010

Source: DPCO

As GDP growth does not necessarily translate into a proportionate increase in revenues, the burden placed by public debt service obligations on government resources is more aptly measured by public debt service as a percentage of government revenues. Weak growth in revenue collection and a faster rate of accumulation of debt during 2007‐08 led to a sharp increase in public debt servicing as a percentage of total revenues in the following year. Servicing of public debt amounted to 47 percent of total revenues during FY09. However, a subsequent reduction in the pace of debt creation and a marginal easing in monetary policy stance have seen this indicator fall to approximately 46 percent in the first three quarters of FY10. 8.1‐3 Dynamics of Public Debt Owing to a revision in the GDP growth for the last two years, the TPD‐to‐GDP ratio has been adjusted to 58.4 percent and 57.1 percent in 2007‐08 and 2008‐09 respectively. For 2009‐10, this ratio in percentage terms rested at 55.6 percent as of March 31. The ratio has declined by 1.5 percentage points from the previous fiscal year, which has mainly been achieved on account of slow‐moving external inflows. In terms of total revenues, public debt as of end‐March has improved slightly to 3.8 times, from 3.9 times in 2008‐09. In real terms, the growth of public debt has been fairly restrained, following a spike in FY08. 9.7 percent growth in real terms witnessed in FY08, coupled with negative real growth of revenues, led to a drastic increase in the country’s debt burden.
Table 8.4: Dynamics of Public Debt Burden, FY05‐FY10* Year GDP Deflator Fiscal Primary Balance Balance FY05 7.7% FY06 7.0% FY07 10.5% FY08 16.2% FY09 20.3% FY10 10.1% * : As of end‐March 2010 ‐3.3% ‐4.3% ‐4.3% ‐7.6% ‐5.2% ‐5.1% ‐1.3% ‐2.3% ‐1.5% ‐2.8% ‐0.3% ‐0.5%

Table 8.3: Public Debt Servicing, July'09‐March'10 (in billions of Rs.) Interest Payments 473.5 Interest on Domestic Debt 428.5 Interest on Foreign Debt 45.0 Repayment of Foreign Debt 166.7 Public Debt Servicing 640.2 (in percent of GDP) Interest Payments 3.2 Interest on Domestic Debt 2.9 Interest on Foreign Debt 0.3 Repayment of Foreign Debt 1.1 Public Debt Servicing 4.4 (in percent of Revenue) Interest Payments 33.8 Interest on Domestic Debt 30.6 Interest on Foreign Debt 3.2 Repayment of Foreign Debt 11.9 Public Debt Servicing 45.7 Source: Budget Wing, MoF

Real Growth of Debt [A] ‐1.7% ‐0.1% ‐0.3% 9.7% 1.4% 2.1%

Real Growth of Revenue [B]

Real Growth of Debt Burden [A‐B] 5.7% ‐7.3% 12.6% ‐12.8% 10.1% ‐10.4% ‐0.7% 10.4% 3.1% ‐1.8% 6.3% ‐4.3% Source: DPCO Staff Calculations 113

Economic Survey 2009‐10

As shown in Table‐8.4, efforts to decrease the fiscal deficit have paid dividend in the form of lower real growth of debt. Further, positive real growth in revenues above and beyond the growth in debt during the FY09 and FY10 has translated to a real reduction in the debt burden. It must be noted however, that the deceleration in the real growth of debt was also influenced by very high levels of inflation witnessed in FY09. As inflationary pressures in the economy were fairly lower in FY10, the real growth in debt has begun to increase marginally. During the first nine months of the current year, total public debt increased by 2.1 percent in real terms, whereas end of year revenue collection is projected to grow by 6.3 percent; leading to a decline in the debt burden of approximately 4.3 percent. Calculation of real (inflation‐adjusted) cost of Table 8.5: Real Cost of Borrowing Year External Domestic Public borrowing reflects not only the interest paid on Debt Debt Debt outstanding debt, but also the price levels and (in percent) exchange rate movements and their impact on the FY05 ‐4.1 ‐0.8 ‐2.3 portfolio. Historically, external debt has been a FY06 ‐4.8 1.1 ‐1.6 cheaper source of borrowing for Pakistan. However, FY07 ‐4.4 5.8 1.1 rupee depreciation against the dollar has had a FY08 3.3 4.5 4.0 FY09 3.4 ‐3.7 ‐0.5 massive impact on the cost of external debt in FY10* ‐5.7 0.2 ‐2.6 various years. The real cost of borrowing from * : As of end‐March 2010 Source:DPCO staff calculations external sources, which is usually negative, increased to as high as 3.4 percent in FY09 owing mostly to the Rupee losing 20 percent of its value against the dollar. With a relatively stable exchange rate, and the concessional nature of Pakistan’s external loans, the cost of borrowing for FY10 stood at ‐5.7 percent in real terms. The cost of borrowing from domestic sources has increased to 0.2 percent in the first three quarters of FY10; however, this increase is partly influenced by lower inflationary pressures as compared to FY09 where the cost from domestic sources was ‐3.7 percent in real terms. 8.2 Domestic Debt In order to bridge the gap between revenue and expenditure on a government’s balance sheet, sovereigns all over the globe rely on debt creating flows, both external and internal. The foreign currency component of financing generally depends on factors beyond the reach and control of governments whereas the domestic sources can be approached at all times, even though at a higher cost. The prime example in this case is borrowing from the central bank (referred to as seignorage, or deficit monetisation). As for Pakistan, stagnant external flows have implied a higher reliance on domestic funding sources. The absence of efficient and liquid debt capital markets has meant that the government has been compelled towards deficit monetization, which runs counter to its stated aim of improving further the debt dynamics of the country. The vulnerability of debt service charges to interest rate variations increases with the piling up of shorter maturities in domestic debt. Additionally, extensive government borrowing may induce inflation through the expansion of money supply. Despite the dangers of excessive reliance on domestic debt, it is important to note that government borrowing through domestic sources is vital in stimulating investment and private savings, as well as strengthening domestic financial markets, since it provides depth and liquidity to the markets.

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8.2‐1 Outstanding Domestic Debt Domestic debt is broadly classified as permanent, floating and unfunded debt. As of end March 2010, the outstanding stock of domestic debt stood at Rs. 4,490.7 billion (See Table‐8.6). During the first nine months of the current fiscal year 2009‐10, Rs. 630.8 billion was added to the stock that yielded an overall growth of 16.3 percent in the domestic debt portfolio of the country. The domestic debt to GDP ratio rose to 30.6 percent by end‐March 2010, an increase of 0.3 percentage points over end‐June 2009, in response to relatively stable nominal GDP growth.
Table 8.6: Outstanding Domestic Debt, FY05‐FY10* FY05 FY06 Permanent Debt Floating Debt Unfunded Debt Total Permanent Debt Floating Debt Unfunded Debt Total Permanent Debt Floating Debt Unfunded Debt Memo: GDP (in billion of Rs.) * : As of end‐March 2010 526.3 778.2 873.2 2,177.7 8.1 12.0 13.4 33.5 24.2 35.7 40.1 6,499.8 514.9 940.2 881.7 2,336.8 6.8 12.3 11.6 30.7 22.0 40.2 37.7 7,623.2 FY07 FY08 (in billions of Rs.) 562.7 616.9 1,107.6 1,637.4 940.0 1,020.3 2,610.3 3,274.6 (in percent of GDP) 6.5 6.0 12.8 16.0 10.8 10.0 30.1 32.0 (in percent of Total Debt) 21.6 18.8 42.4 50.0 36.0 31.2 8,673.0 10,243.0 FY09 685.9 1,903.5 1,270.5 3,859.9 5.4 14.9 10.0 30.3 FY10* 779.3 2,299.7 1,411.7 4,490.7 5.3 15.7 9.6 30.6

17.8 17.4 49.3 51.2 32.9 31.4 12,739.0 14,668.0 Source: Budget Wing, MoF

The short‐term nature of domestic debt is evident by an ever increasing share of floating debt in the total stock. As of end‐March 2010, more than half of the domestic debt is composed of government debt instruments having tenors of a year or lesser. The contribution of permanent and unfunded debt has decreased to 17.4 percent and 31.4 percent, in comparison to previous year’s share of 17.8 percent and 32.9 percent respectively. High dependence on short‐term debt leaves the domestic debt portfolio exposed to refinancing risk. 8.2‐1(i) Permanent Debt The permanent debt on account of healthy inflows in Pakistan Investment Bonds (PIBs) to the tune of Rs. 52.4 billion grew by 13.6 percent. An almost equal addition was jointly contributed by Prize Bonds (Rs. 27.4 billion) and Ijara Sukuk (Rs. 14.4 billion) during the period under review. Meanwhile, the government successfully retired the maturing Federal Investment Bonds (FIBs). The State Bank of Pakistan (SBP) conducted four PIB auctions in the ongoing fiscal year with the target of Rs. 10 billion per auction. The market participated with vigor surpassing the target in almost every auction. Although Ijara Sukuk (issued in 2008‐09) made a one‐time appearance during the period under review, this fairly new instrument mobilized enormous funds from the Islamic market. Such a strong input suggests the untapped potential of the budding Islamic market and calls for a continuation of this initiative in the years to come.

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Fig‐8.4: Major Domestic Debt Inst truments FY0 05‐FY10
4,200 3,900 3,600 3,300 3,000 2,700 2,400 2,100 1,800 1,500 1,200 900 600 300 0 FY05 FY06 FY07 F FY0 08 FY09 FY10

(Rs. billion)

NSS PIBs MRTBs MTBs

Source: Bud dget Wing, DPC CO Staff Calculation

Moreover compliance with the po r, e olicy steps ta aken in the p previous year to draw a line between debt r creation a monetar policy exec and ry cution has im mparted certa ainty to the g government securities ma arket. These ste eps include publication of yearly auctio on calendars and their pe eriodical revis sion, adheren nce to volume ba ased auctions s and the dec cision of cut‐o off yields for p primary aucti ions by the M Ministry of Fin nance. Going forward, such measures c can be the building blo ocks of a w well‐integrated and articu d ulated macroeco onomic policy y covering fisc cal, monetary y and debt sec ctors of the e economy. 8.2‐1(ii) F Floating Debt t The stock k of floating d debt experien nced the highest growth o of 20.8 percen nt in 2009‐10 0 (July 2009‐M March 2010) am mong the major categories of domestic debt and ended at Rs. 2 s c 2,299.7 billion as of Marc 31, ch 2010. Bul of this increase is attri lk ibuted to hefty net proce eeds from M Market Treasu Bills (MTB of ury Bs) about Rs. 311 billion fa alling under the ambit of floating debt. The market p preference of f government t debt instrumen owing to risk aversio and absen of private sector cred demand, g nts, o on nce e dit greatly assist in ted augmenting the participation in MT TBs auction ov ver and above the targete ed amounts. On the ot ther hand, ce entral bank bo orrowing thro ough Market Related Trea asury Bills (M MRTBs) was lim mited to Rs. 85.7 7 billion durin ng July 2009 t to March 201 10, which is a result of the government’ ’s target unde er the SBA of pu ursuing a position of net z zero quarterly y borrowing f from SBP. Th he growth of 7.5 percent i in the stock of M MRTBs during g the first thre ee quarters of f 2009‐10 alb beit higher tha an 5.2 percen nt witnessed in the previous y year has undo oubtedly rece eded from the e rate of incre ease of 133 p percent record ded in 2007‐0 08. Subdued credit deman nd from the p private sector has been an underlying th heme of the y year and a primary cause of h huge increme ents in case o of market deb bt instruments (PIBs and MTBs). Banks s preferred to o lock in at highe er rates owin ng to a genera al perception of an interes st rate peak in n the market. Furthermore, the losses bor rne by the ba anking sector r on account of non‐performing loans k kept them aw way from reso orting to the pr rivate sector requirement even thou negligible. With the gradual resu ts, ugh urgence of private sector cre demand lately and m edit market expec ctation of an interest rate hike at the back of renewed e e 116

Public Debt

inflationary pressures, banks have started concentrating on the 3‐months paper. This may disrupt the ongoing trend of heavy investments in MTBs in future. 8.2‐1(iii) Unfunded debt The unfunded category of internal debt, composed of NSS instruments, has recorded a modest expansion of 11.1 percent during the ongoing fiscal year (till March 2010). Special Savings Certificates attracted Rs. 81.7 billion followed by Bahbood Savings Certificates and Regular Income Scheme. Massive retirements in Defence Savings Certificates turned the net accrual to a negative Rs. 35 billion during the period under review. The Central Directorate of National Savings (CDNS) launched tradable bonds with the name of National Savings Bonds having maturity of 3, 5 and 10 years in January 2010. The stock of these bonds stood at Rs. 3.7 billion as of March 31, 2010 with an almost 95 percent concentration in the 3‐year tenor. The NSS contains a number of instruments with similar features, however targeting different market segments. Out of eight instruments, three schemes have a 3‐year maturity, four are a 10‐year instrument and two are a 5‐year instrument. From the incremental borrowing of Rs. 172 billion, Rs. 59 billion or 34.6 percent are generated through Pensioners’ Benefit Account and Bahbood Savings Certificates carrying very high interest rates (See Table‐8.7).
Table 8.7: National Savings Schemes Schemes Maturity (years) Savings Account Special Savings Account Pensioners' Benefit Account Defence Savings Certificates Special Savings Certificates Regular Income Certificates Bahbood Savings Certificates National Savings Bonds Prize Bonds Total 3 10 10 3 5 10 3,5,10

Quoted Rate (in percent)

Outstanding Variance Percentage Share in Total 31‐Mar‐10 Mar ‐ Jun (in percent) (in millions of Rs.) 8.50% 15,568 (538) ‐0.31% 11.67% 118,400 30,750 17.96% 14.16% 124,043 14,163 8.27% 12.15% 222,156 (35,458) ‐20.71% 11.67% 341,100 52,150 30.46% 12.00% 125,047 34,045 19.89% 14.16% 352,639 45,105 26.35% 12.50% 3,650 3,650 2.13% 8.50% 224,765 27,325 15.96% 1,527,367 171,191 100% Source: CDNS, Budget Wing, MoF and DPCO staff calculations

The embedded put option in most of the schemes under the NSS umbrella can be a potential source of severe liquidity crisis as a probable rate hike will immediately be capitalized upon in the presence of a put option facility. Moreover, automatic rollovers, cash accounting and zero coupon in NSS result in inconsistent fiscal numbers. For instance, the zero coupon DSCs of almost Rs. 80 billion issued in late 1990s did not appear in the budget until they were matured recently in the last three years, hitting the budget by more than Rs. 400 billion. This cost might have been spread during the 10 year tenor, had there been an accrual accounting practice prevalent in the CDNS in particular and government in general. CDNS was established by the government with the intention of mobilizing savings of retail markets, however, non bank institutional investment has traditionally dominated this category of unfunded debt. These institutional investors also invest in wholesale markets and benefit from the interest rate
117

Economic Survey 2009‐10

arbitrage between the two markets. 8.2‐2 Domestic Debt Burden Interest payments on domestic debt largely reflect the servicing cost on previous stock. The interest payments for the period of July 2009‐March 2010 aggregated to Rs. 428.5 billion.
Table 8.8: Domestic Debt Burden Fiscal (in billions of Rs.) Year Domestic Interest Debt Payments FY05 2,177.7 176.3 FY06 2,336.8 202.5 FY07 2,610.3 326.9 FY08 3,274.6 442.6 FY09 3,860.5 580.5 FY10* 4,490.7 428.5 * : As of end‐March 2010

Tax Revenue 26.7 25.2 36.7 42.1 48.2 41.6

Interest Payments as % of Total Total Current GDP Revenue Expenditure Expenditure (mp) 19.6 15.8 18.7 2.7 18.8 14.4 18.1 2.7 25.2 19.5 23.8 3.7 29.5 19.4 23.8 4.3 31.4 22.9 28.4 4.6 30.6 21.1 24.9 2.9 Source: Budget Wing, MoF

As a percentage of major macroeconomic indicators, interest payments have started deteriorating since 2007‐08. This weakening has meant that payments owing to interest expense have consumed a major chunk of limited budgetary resources in the past few years. Additionally, this trend indicates that interest payments have emerged as the largest component of current expenditure in the fiscal account. In continuation of this trend, interest payments on domestic debt in proportion to tax revenue amounted to 41.6 percent in the first nine months of 2009‐10. 30.6 percent of the total revenues have been used to pay off the interest due on internal debt. Similarly, the share of interest expenditure on domestic currency debt in total and current expenditures has become 21.1 percent and 24.9 percent respectively. The ratio of interest payments to projected GDP has depicted a slight improvement during July 2009‐March 2010, decreasing from 4.6 percent in 2008‐09 to 2.9 percent as of March 31, 2010 (See Table‐8.8). 8.3 External Debt & Liabilities Pakistan’s external debt and liabilities (EDL) include all foreign currency debt contracted by the public and private sector, as well as foreign exchange liabilities of the Central Bank. EDL has been dominated by public sector external debt due to a chronic current account deficit and substantial foreign financing through loans from multilateral and bilateral donors. Public sector external debt includes financing for Balance of Payments support as well as foreign currency financing of the budget deficit. Debt obligations of the private sector are fairly limited and have been a minor proportion of EDL. The explicit concessional terms of loans (low cost and long tenors) contracted with international financial institutions or donor countries have concealed the inherent capital loss associated with foreign currency debt to some extent. On the contrary, after accounting for the exchange rate loss, foreign currency loans from multilateral and bilateral donors are contracted at a lower rate as compared to domestic currency debt (an average cost differential of approximately 1.1 percent over the last 19 years). Consequently, government has historically remained favourable in terms of borrowing through these channels given the macroeconomic importance of foreign financing flows in Pakistan. 8.3‐1 Outstanding External Debt & Liabilities During the first nine months of the current fiscal year 2009‐10, Pakistan’s external debt and liabilities 118

Public Debt

increased by US$ 2 billion or 3.8 percent. The outstanding stock as of end‐March FY10 stood at US$ 54 billion as opposed to US$ 52 billion at the end of FY09. In absolute terms, the first three quarters of FY10 have witnessed the lowest increase in the stock of EDL during the last three years.
Table 8.9: Pakistan: External Debt and Liabilities 1. Public and Publically Guaranteed Debt A. Medium and Long Term(>1 year) Paris Club Multilateral Other Bilateral Euro Bonds/Saindak Bonds Military Debt Commercial Loans/Credits B. Short Term (1 year) 3. IMF of which Central Govt. Monetary Authorities Total External Debt (1 through 3) (of which) Public Debt 4. Foreign Exchange Liabilities Total External Debt & Liabilities (1 through 4) (of which) Public Debt Official Liquid Reserves Total External Debt (1 through 3) 1. Public and Publically Guaranteed Debt A. Medium and Long Term(>1 year) B. Short Term (