Domestic debt Interest payment costs Rs 485 billion during July-November

The rising budgetary borrowing of the federal government has cost Rs 485 billion of interest payment on domestic debt during the first five months of this fiscal year (FY15). As a part of efforts to improve the maturity profile of domestic debt, during the last one year the federal government has successfully substituted the short-term debt (Market Treasury Bills) with longer-term debt (Pakistan Investment Bonds) and the re-profiling of domestic debt is not without a cost.
"Long-term borrowing is more expansive than short-term one, however in order to re-profile domestic debt, the federal government raised long-term debt at higher rates," bankers said. The re-profiling and higher borrowing for the budgetary support has increased the burden of domestic debt servicing and likely to remain on an upward side during upcoming months, they added. According to the State Bank of Pakistan (SBP), interest payments on domestic debt have posted a growth of 6.5 percent during July-November FY15. The federal government has spent some Rs 485 billion on account of interest payment on domestic debt during the first five months of this fiscal year compared to Rs 455 billion in corresponding period of last fiscal year, depicting an increase of Rs 30 billion.
Economists said that in the absence of sufficient revenue growth, excessive reliance on costlier domestic resources for financing is increasing the country's debt servicing burden on the economy. In long-term rising payments of debt servicing may complicate debt management for the government, they added.
However, they said that ease monetary policy stance and recent reduction of 1 percent in the key policy rate may help to reduce the government's debt servicing. Cut-off yields on the PIBs and MTBs have already declined after the cut in the interest rate by the State Bank, they added.
The detailed analysis revealed that interest payment on two components of borrowing including permanent and unfunded has posted an upward trend, while interest payment on floating debt is on decline. This trend reflects the government's intention to borrow through long-term papers instead of short-term ones.
During the period under the review, interest payment on permanent debt has posted an increase of 108 percent. with the current surge, interest payment on permanent has reached Rs 205 billion in July-November FY15 compared to Rs 99 billion in the same period of the last fiscal year. Permanent debts include market loan, federal government bonds, income tax bonds, federal investment bonds, the Government of Pakistan Ijara Sukuk and prize bonds etc.
The federal government paid Rs 180 billion as interest on floating debt in the first five months of this fiscal year as against Rs 265 billion in corresponding period of the last fiscal year, showing a decline of 32 percent. The floating debt includes treasury bills, Market Treasury Bills and MTBs for replenishment of cash. Similarly, with an increase of 8 percent, debt servicing of unfunded debt, which comprise saving schemes (net of prize bond), postal life insurance and GP fund, surged to Rs 99 billion during the period under review.