Domestic debt does not carry currency risk: SBP

The State Bank of Pakistan (SBP) said on Friday any movement in the international currencies and PKR vs US dollar can change the dollar and PKR values of external debt respectively. According to SBP''s second quarterly report issued on Friday, within public debt, the external debt is contracted in different currencies and then converted into US$ and then to PKR for the reporting purposes. Thus, any movement in the international currencies (in which debt is contracted) and PKR vis-à-vis US$ can change the dollar and PKR values of external debt respectively. On the contrary, the domestic debt does not carry currency risk, it added.
In dollar terms, Pakistan''s public external debt stood at US$ 66.9 billion as of end December 2017, registering a growth of 6.9 percent over June 2017. While, in rupee terms, however, the debt increased by 12.6 percent to reach at Rs 7.3 trillion as of end December 2017. The difference in growth primarily reflects the impact of PKR depreciation during the first half of FY18, the report said. As of end December 2017, Pakistan''s public debt amounted to Rs 22.8 trillion, of which around Rs 15.4 trillion is denominated in local currency.
This means around two-third of the public debt is not prone to any currency risk. On the other hand, the PKR depreciation against US$ increased the PKR value of the external debt; however, this has not added to foreign currency liability of the country, SBP mentioned. However, the impact of depreciation on government accounts is realized when the repayment of external debt is actually made. SBP also highlighted that the entire amount of debt does not mature on the same day; rather, it becomes due over a period of time.
Usually countries with higher short-term debt suffer most from the exchange rate depreciation, only when creditors refuse to roll over the debt while reserves are also insufficient to cover the debt maturities. In case of Pakistan, the short term external debt accounts for only 1.7 percent of total public external debt, of which around 80 percent is Islamic Development Bank (IDB) short-term financing for oil imports.
Moreover, Pakistan''s short term debt is equivalent to 8 percent of country'' FX reserves, which provides sufficient liquidity buffer in case of any repayment difficulties. The available literature on public debt sustainability suggests that the depreciation could have both negative and positive impact on debt sustainability. Once currency depreciates, servicing cost increases and that has the negative balance sheet impact on public debt. At the same time, the depreciation increase the price competiveness, boosts net exports, government revenues and hence has a positive income effect on GDP, the report stated.