MONDAY JUNE 18: Domestic debt: Interest payments rose to Rs 649.9 billion in fiscal year 2011

ISLAMABAD: A report compiled by the Auditor General of Pakistan (AGP) revealed that interest payments on domestic debt have risen to Rs 649.9 billion in the financial year 2011 as compared to Rs 577.7 billion in the previous year.
According to Audit Report-2011-12 on Fiscal responsibility and Debt Limitation Act, 2005, Ministry of Finance, the interest payments on domestic debt would further increase during the fiscal year 2012-13 due to devaluation of rupee in the market whereas gross borrowing will also increase as the government will require more funds to finance its budgetary gap for the year.
The report says that this increase was largely due to the sharp increase in short term government borrowings during FY 2011 and a re-pricing of the accumulated stock of floating debt as of end FY 2010. The report further says with the increase in debt ratio, the exchange value of the currency may fall. "Paying back debt with cheaper currency could cause investors to demand higher interest rates if they anticipate further depreciation.
Paying higher interest rates could slow domestic growth. Higher debt increase interest payments on debt. Further, a higher public debt to GDP ratio may also slow economic growth," the report says. The report further says that the entire stock of Rs 2.4 trillion at the beginning of the year was rolled over during FY 2011 on higher interest rates. Specifically, the interest on floating debt jumped to Rs 361.4 billion; this represents year on year (YoY) growth of 49.9 percent. The interest payment on permanent debt also grew by 23.6 percent in FY 2011, on the account of both volume and price effects.
The report says that the real growth of debt has been greater than the real growth of revenues complemented by primary deficit resulted in increase of debt burden and public debt stood at 4.7 times of the government revenues at the end of FY 2011. "This ratio is gradually deteriorating over a period of time and government must take corrective measures to reverse this trend and bring this ratio down to acceptable threshold of 3.5 times," audit recommended the government in the report.
The report further revealed that the principal repayments to disbursements ratio was 56.6% in FY 2010 that increased to 90.3% in FY 2011. This means that most of the disbursed amounts were used in paying off the maturing external debt. The audit office said that this is serious situation that requires urgent attention of the policy makers as was evident from shrinking of Net Foreign Assets of the banking system.
Large-scale government borrowing from domestic sources entails crowding out of private sector activities. The government borrowings from commercial banks increased by Rs 590.2 billion during FY 2011 compared to an increase in private sector credit of Rs 121.3 billion. The government is heavily exposed to rollover and interest rate risks.