Pakistan's debt dynamics benefit from low effective real interest rates, the Sixth Review under the extended fund arrangement and modification of performance criteria maintains.
The review further adds that the domestic debt is largely in local currency and short-term with the share of over 50 percent. The share of medium-term bonds remains below 20 percent, although it has been increasing recently as the authorities extend the yield curve. Therefore, funding remains reliant on short-term debt (over 50 percent) and on the national saving schemes, which provide a relatively captive investor base. Although the authorities have issued more external debt as part of their diversification strategy, public external debt remains largely with official creditors, as bonds and bank private creditors' account for only about 3 percent of the total. Fiscal adjustment not only improves the debt ratio under the baseline scenario, but the declining trend is quite resilient to standard size shocks envisaged in the Debt Sustainability Analysis DSA. The debt would stabilise even under significant shocks, and it is only when one restricts the distribution of positive shocks to the primary balance that the debt-to-GDP
Gross external debt as a percentage of GDP has been in a declining trend - reaching 26.2 percent in 2014 - and is expected to see a modest decline in the coming years. This is consistent with relatively stable gross financing needs, which are expected to remain in a range of 2.7 to 3.7 percent of GDP. Moreover, the short-term financing risk for non bank private sector is expected to remain low. Bound and stress tests suggest that the external debt-to-GDP ratio is resilient to adverse shocks. While sensitive to growth and exchange rate shocks, the external debt ratio would not exceed 37 percent of GDP under any scenario.
The budget deficit (excluding grants) was below the end-December performance criteria Rs 50 billion (0.2 percent of GDP), partly by restraining development expenditure. Tax revenues at the federal level, however, fell short of the second-quarter indicative target by Rs 22 billion (0.08 percent of GDP) due to legal challenges to a number of revenue measures and to lower tax collections related to the drop in international oil prices. The end-December indicative target on cash transfers under the Benazir Income Support Program (BISP) was met.
Government borrowing from the SBP was below the end-December ceiling by Rs 86 billion due to: (i) issuing a $1 billion international Sukuk issue in late-November; (ii) issuing ample T-bills and Pakistan Investment Bonds (totalling Rs 363 billion); and (iii) the outright selling of SBP holdings of government securities on the secondary market (Rs 90 billion), which compensated for the deferred sale of a stake in Oil and Gas Development Company Limited (OGDCL). The 2014 end-December NIR target was comfortably met (by over $800 million).
The SBP spot purchased nearly US $1 billion compensated for the shortfall in privatisation revenues. The SBP's net short position of swap/forward contracts also narrowed to $15 million below the program target.
The authorities over-performed the end-December NDA target by Rs 281 billion, as borrowing from the SBP was contained, foreign exchange inflows were adequately sterilised, and excess liquidity of Islamic banks absorbed by selling Ijara Sukuk papers.
The SBP purchased Ijara Sukuk issued by the government on a deferred payment basis from commercial banks and sold it to Islamic banks, absorbing their excess liquidity. This is a temporary measure to contract NDA.