Sindh's debt may soar to Rs 409 billion by end of current FY

The total debt of Sindh has been projected to surge to Rs409 billion and Rs426 billion by the end of this financial year and during the next fiscal respectively. The total debt of Sindh presently stands around Rs356 billion by showing upward trend compared to Rs281 billion in the last financial year, the budget analysis document of provincial government revealed.

Sindh Debt Portfolio comprises of two categories - Domestic and External Debt. The current position of external and domestic debt portfolio reconciled with relevant federal divisions as of June 30, 2019 is Rs 356,351 million and Rs 13,026 million respectively.

An upward trend in foreign loans of the Government of Sindh has been witnessed in last three years. On account of external debt portfolio, an increase of 26.6 per cent and amount of Rs 75,018 million was increased in FY 2018-19.

Total loan disbursements and principal payments recorded for the year were Rs 22,078 and Rs 13,806 million and a currency depreciation effect for PKR 66,557 million.

In addition to domestic and foreign debts, the General Provident Fund is another big component of Sindh Government's liability.

The external funding mostly obtained through World Bank IDA loans and Asian Development Bank loans which constitutes 61.8 per cent and 34.5 per cent respectively of total Sindh external debt portfolio.

There is a third major source of funding through JICA indicating 3.5 per cent and rest are almost negligible.

Sindh Debt portfolio comprises of only three foreign currencies, i.e. USD, SDR and JPY. The major exposure of exchange rate risk comes from USD denominated loans with 66.84 per cent, SDR 28.23 per cent followed by Yen and PKR with 3.46 per cent and 1.47 per cent respectively.

Depreciation of Pak Rupee on account of USD, JPY and SDR denominated loans would affect both the stock of Sindh government debt as well as debt servicing flows, the document indicated.

The budget estimated interest charges for FY 2019-20 is Rs 5,407 million comprises of Rs 1,464 million and Rs 3,943 million on account of variable and fixed rates share respectively.

The debt is also payable by Sindh Government towards the federal government on account of domestic loans (CDL - Cash Development Loans). The interest rate on CDLs ranges from 7.42 per cent to 17.71 per cent per annum and comprises of uniform amortization period of 25 (twenty-five) years including a grace period of 5 (five) years.

The weighted average interest rate (WAIR) for the domestic portfolio as of June 30, 2019 is 11.8 percent. Currently the current State Bank of Pakistan (SBP) benchmark interest rate is 13.25% and we should at least consider the accelerated retirement of loans for around of Rs 3,200 million which are higher than SBP discount rate.