Pakistan's gross financing needs

Pakistan's gross financing needs have been projected at 51.2 percent of Gross Domestic Product (GDP) in 2020 in the International Monetary Fund's (IMF's) biannually prepared Fiscal Monitor titled "Policies to support people during Covid-19 pandemic." This projection is at considerable variance with the figure cited in the April 2020 staff report uploaded on the IMF website titled "Request for Purchase under the Rapid Financing Instrument" where the gross financing needs for the current year are estimated at 32.4 percent of GDP. Nominal gross public debt is projected in the staff report at 89.8 percent in 2020 of which guarantees (including guarantees to public sector entities) are estimated at 4.4 percent of GDP.

Notwithstanding the high nominal debt as a percentage of GDP, the IMF staff report on RFI notes that Pakistan's debt is sustainable (though risks post-Covid-19 have increased) because: (i) it is supported by agreed rollover of maturing obligations by China (2 billion dollars), Saudi Arabia (3 billion dollars plus 3.2 billion dollars deferred oil facility) and the UAE (one billion dollars) - proof of which is evident in the past nine months as well as improved cash flow management through a treasury single account, integration of domestic, private sector external and multilateral borrowing units under one single operation, lengthening maturities in the domestic market by accepting market rates and developing Islamic lending given few existing compliant government instruments - actions that also account for reducing gross financing needs to 19.5 percent of GDP by 2025; (ii) maturity structure of the debt has improved. This is reflected by reduction in effective interest rate (interest payments divided by debt stock) (excluding guarantees) at the end of previous year from 8.2 percent in 2009-17 to 7 percent in 2018, 8.4 percent in 2019 and 7.8 percent in the current year; and (iii) portfolio outflows have put some pressure on the foreign exchange market, however as Pakistan's exposure to capital markets is relatively limited, risks are minimized.

Pakistan's financing needs therefore are high and are likely to remain high during the ongoing pandemic as well as after the pandemic subsidies and the IMF's 39-month Extended Fund Facility becomes operational again. The pandemic has highlighted severe deficiencies in Pakistan's health sector while previous and incumbent administrations have acknowledged severe deficiencies in other social sectors including education and physical infrastructure sectors including roads and energy. Lack of resources was and continues to be cited as the major impediment to meeting the challenges posed by these deficient sectors.

Given the IMF's assessment that Pakistan's debt is sustainable because of extending the debt's maturity period one possible way to meet the financing needs required to improve infrastructure at a low cost would be through going directly to the public by issuing infrastructure bonds of longer tenors. Market players are of the view private sector investors would like to lock down their investment in fixed income guaranteed instruments especially at present as there is a perception in the market that the discount rate may fall further - from 9 percent to a projected 7 percent before the end of the current fiscal year on 30 June 2020. They further contend that today a lot of the country's savings are parked in national savings centres which are not productive (though the government does borrow heavily from this source), adding that if the bond issuance is disciplined a lot of the NSS funds would move into infrastructure bonds. It would therefore be advisable that the government further explore cheap financing instruments of longer tenors given our heavy financing needs especially during and up to 24 months after the pandemic subsides.