Domestic debt

EDITORIAL: The federal government has retired over one trillion rupees of domestic debt borrowed for budgetary support in the first quarter of the current year supported by healthy foreign inflows and record profit of State Bank of Pakistan (SBP). Three observations are critical.

First, the budget for the current fiscal year projected domestic debt servicing at 8.736 trillion rupees – higher than revised estimate figure of 7.211 trillion rupees or a rise of 21 percent, the exact percentage rise in the budgeted current expenditure.

It is unclear whether the one trillion rupee retirement in domestic debt was on treasury bonds that had matured and therefore would not change the budgeted domestic debt servicing costs or whether this was an amount that was not budgeted to be retired and thereby have a positive impact on the budgeted domestic debt servicing costs.

Data uploaded on the SBP website indicates that the government’s reliance on investment bonds and treasury bills rose from 38.19 trillion rupees end June 2024 to 387.7 trillion rupees in July 2024 (a rise of 1.3 percent in one month) and again rose to 39.1 trillion rupees by August (another rise of 1.2 percent when compared with July). The figure for September has not yet been uploaded.

Second; the claim that this was due to healthy inflows of foreign debt is a source of concern for domestic economists as this healthy rise in inflows is largely debt incurred from the International Monetary Fund (IMF) as well as other multilaterals and cash deposits and loans from the three friendly countries — China, Saudi Arabia and the United Arab Emirates.

Foreign debt incurs debt servicing in dollars which despite the healthy foreign exchange reserves, which as per the Finance Minister are not more than two and half months of imports while the standard requirement is three months of imports, may present a considerably greater challenge as and when due relative to domestic debt repayments.

And finally, the SBP profits have been reported at 3.4 trillion rupees last fiscal year, up by 200 percent from 2023’s 1.142 trillion rupees attributed to high rate of interest and exchange gains. This amount is higher than the revised estimates for last year of 972,183 million rupees as per budget documents released in June this year as well as the 1.113 trillion rupees budgeted for last fiscal year.

However, the budgeted SBP profit for the ongoing year is 2.5 trillion rupees, an amount regarded as rather optimistically high before this latest claim by the SBP based on debt retirement by the government (July to 4 October this year up from 335 billion rupees in the same period of fiscal year 2024, reflecting an additional retirement of 765 billion rupees).

It is important to note that there is evidence that all those indicators that are associated with higher external borrowing inflows have strengthened since the IMF board approval of the ongoing EFF; however, those indicators that measure the quality of life of the poor and the vulnerable seem to be held hostage to the conditions (prior as well as post-loan approval) agreed with the Fund.

In other words, the electricity rates continue to be jacked up and the government is mainly to blame as it began to implement policies that envisaged reliance on renewables as a cheaper energy source without taking account of the take or pay contracts signed with the Independent Power Producers that would necessitate higher tariffs as demand declines to meet the full cost recovery condition set by the Fund.

Rents continue to rise while prices of food items have come down, though this is a seasonal factor.

Although there is good news on the economic front, it continues to be tempered by higher external borrowing whose repayment of interest and principal as and when due requires foreign exchange earnings from desired sources (trade surplus and official remittances) rather than as is the case from ever rising levels of foreign borrowing.

Copyright Business Recorder, 2024