Debt strategy for Fiscal year 2011: government to get Rs 499 billion domestic, Rs 86 billion from external sources

The government will obtain Rs 499 billion from domestic bank and non-bank sources while Rs 86 billion has been budgeted from external sources for FY11, reveals Pakistan Debt Policy Statement 2010-11. The government has adopted a comprehensive debt management strategy for FY11 with key focus on "exploring foreign currency borrowing avenues and augment the domestic liquidity."
According to the strategy, Rs 499 billion financing is to be obtained from domestic bank and non-bank sources while Rs 86 billion from external sources. Deficit financing as envisaged in the Federal Budget 2010-11 focuses mainly on domestic sources, the strategy reveals.
According to Debt Policy Statement 2010-11, likely to be laid in the National Assembly in the coming session, the remaining Rs 100 billion is expected through disbursement of grants from external sources. The higher reliance on domestic sources in the medium-term framework will continue to put upward pressure on domestic interest rates and crowd out the private sector credit.
It is therefore imperative to explore foreign funding avenues and ways to augment the domestic liquidity of banking sector that will allow reliving some pressure from domestic interest rates and create possibility of crowding out of private sector credit, the statement said.
The Policy Statement further reveals that a shift in financing mix towards foreign currency flows will also reduce pressure on domestic sources, providing room for credit provision to private sector and creating space for easing policy rates if required. In view of the persistence of a current deficit, the proposed mix will provide some balance of payment support, while ensuring against the consequences of a rebound in international commodity prices or weaker than expected export performance. Additionally, access to such financing will be crucial in case of non-materialisation of budgeted foreign currency loans and grants.
According to the Policy Statement, under the strategy, the government will mobilise $500 to 1000 million from international debt market in addition to the budgeted Rs 43 billion ($500 million). This may seem like an expensive and difficult option in the context of recent sovereign debt crisis. It will aid in reliving some pressure from domestic interest rates. The savings on domestic borrowing will outweigh this additional cost.
Moreover, steps may be taken to augment the domestic resources envelope. One way could be to reduce currency-to-deposit ratio that currently hovers around 33.2 percent (as of January 8, 2011), highest in the region. With money multiplier of 3.2 times (as of January 8, 2011), a small reduction in CDR can significantly add to resource envelope. The Ministry of Finance in consultation with the State Bank of Pakistan (SBP) will work out a plan to address this issue.
A major second source of supplementing domestic liquidity could be to unlock personal equity. Banking penetration is comparatively lower in the rural economy owing to non-documentation/non-valuation of the real estate in rural areas. In this regard, measures will be taken to incentivise the rural public to borrow against their assets. This will not only help in supplementing liquidity but would also provide needed stimulus to domestic demand of goods and services.
To increase the duration of domestic debt, the government intends to borrow more in longer tenor maturities. This will allow deepening of the domestic interest rate yield curve and help develop the domestic debt capital markets. The proposed funding plan will reduce reliance on treasury bills from 53 percent of the domestic debt portfolio to 47 percent by FY13.