Debt management

Finance Minister Ishaq Dar chaired a meeting over the weekend to discuss measures to improve public debt management. This remains an integral component of the 6.64 billion dollar Extended Fund Facility (EFF) programme approved by the International Monetary Fund (IMF) shortly after the Sharif administration was sworn in. The mandatory quarterly eighth review was recently completed; however, the detailed IMF staff report as well as the Letter of Intent (LoI) submitted by the government as a prerequisite for IMF Board approval for the release of the next tranche is still awaited.
A little over a month ago the IMF uploaded the LoI and the seventh staff review of EFF on its website - on 2nd July 2015 - in which the government committed that it would continue efforts to (i) diversify financing from domestic and external debt, (ii) lengthen the maturity profile of domestic debt and (iii) strengthen the debt policy co-ordination office (DPCO) to become functional and undertake analytical functions typical of a middle office. The IMF seventh review report acknowledged that the authorities met end-March 2015 condition on State Bank reorganising the DPCO as a middle office responsible for updating the medium-term debt strategy (MTDS) and monitoring its implementation and co-ordinating credit risk management functions. However, the review specified new time-bound structural benchmarks with respect to the functions of the DPCO - timelines which are still in the future. The DPCO is expected to publish an updated MTDS by end-January 2016, appoint a risk management staff (director and two staff) and begin publishing quarterly debt management risk reports covering all government liabilities including guarantees by end-October 2015. These actions, if taken by the government in letter and spirit, would generate savings as well as account for more effective government borrowing decisions.
Be that as it may, the stock of government debt was as high as 65.3 percent (including guarantees) in 2013-14 and projected at 62 percent in 2014-15. In total terms, total government debt including liabilities were estimated at 14,647 billion rupees in 2012-13, 16,013 billion rupees during the first year of the Sharif administration and 17,126 billion rupees was projected for 2014-15. The review added that efforts continue to diversify financing from domestic and external sources and further lengthen the maturity profile, however, the authorities committed to providing the Fund with a detailed financing plan for the coming 12 months - a prior action agreed before submission of the sixth review report to the IMF Board for approval of the tranche release in December last year. This requirement may have been considered necessary from the Fund's perspective as the government's heavier reliance on borrowing from the banking as well as the non-banking sector (including from the savings centres), given its commitment to severely contain from borrowing from the State Bank, led to crowding out of private sector borrowing with a commensurate negative impact on domestic productivity.
Pakistani governments have a poor performance record of taking informed decisions with respect to borrowing. The incumbent government is no exception. Our external and domestic indebtedness is on the rise and more disturbingly the government has issued Eurobonds (including sukuk) at rates well above those prevalent in the international market place. There is a perception that Finance Minister may be reluctant to cede his ministry's power to autonomous institutions and his critics maintain that he is unlikely to implement the agreed IMF condition of strengthening the DPCO in spirit. This would be unfortunate as by strengthening institutions Ishaq Dar would leave a favourable legacy.