In the midst of the on-going disruption in the normal functioning of economic transactions following the revenue raising measures introduced in the 2019/20 budget and the continuing confusion and uncertainty on the institutional arrangements, mechanisms and the manner of implementation of the proposed instruments for resource mobilization comes the release by the State Bank of the country's public debt outstanding at the end of the last fiscal year.
This data shared recently by the SBP reveals that the level of Government debt has grown sharply during the course of this year by 34%, and from 70.4% of GDP at the end of June 2018 to 82.8% on June 31,2019. The bigger increase is in the component of external debt, around 42%, much of it explained by the 34% depreciation in the exchange value of the rupee. However, the more intriguing upward movement, of 26.3%, is in the size of domestic debt. Its ratio to GDP at the end of the year has risen to 53.8% from 47.7% of GDP a year earlier, an increase of over 6 percentage points of GDP in just one year!
The news reports on the publication of this data have focused on the total increase in debt during the year, the impact of the rupee depreciation on the level of this debt and how the government's short-term borrowings (in the shape of Treasury Bills for Replenishment of Cash) from the State Bank have been converted into long-term Pakistan Investment Bonds (PIBs). What has seemingly been overlooked in these review reports is the linkage of this abrupt increase (especially in the domestic component of this debt) on the budget deficit. The level of the deficit at Rs 4630 billion and its ratio to the GDP of 12 percent is way beyond what had been estimated as the likely outcome at the year end, even by the IMF in its estimates for the year ended June 2019. In fact, if this is the case, then this will be by far the biggest budget deficit as a percent of the GDP ever recorded.
This article confines itself initially to highlighting the pace at which it has increased while raising questions on the mysterious acceleration in the growth of the domestic portion of the debt in the last quarter of the year, i.e. since March 2019. For this analysis we have accepted the movement/increase in the external debt, because the depreciation of the exchange rate by roughly Rs 42 (using the June 2019 terminal exchange rate of Rs 163) since June 2018 year was a key factor contributing to the increase in the foreign exchange value of the stock of external debt at the close of the year.
Until the third quarter of the year that ended March 2019 the outstanding domestic debt was Rs 18,170 billion, portraying an increase in debt of Rs 1,754 billion in the nine months to March 2019 (see table below). The increase in this debt must have financed the government's budget deficit, equal to 4.5% of the GDP. However, in contrast to this magnitude of financing of the fiscal deficit from domestic sources the fiscal operations data released by the Ministry of Finance for the same period on the financing contribution of the domestic debt component signposts a lower budget deficit financing from domestic sources, Rs 1,398 billion (approximately 3.6% of GDP). Resultantly, there is an unexplained difference of Rs 356 billion (roughly 0.9% of GDP) (see table below). -compared with a much smaller difference of Rs 92 billion in the case of FY 18- with no official clarification on what this additional amount was expended, for it not to be reflected in the financing of a higher budget deficit.
But post March 2019, there is an intriguing sharp escalation in the outstanding domestic debt from Rs 1,870 billion to Rs 4314 billion at the end of June 2019, an astronomical increase of Rs 2,560 billion in a mere three months. This increase has come in the shape of Market Treasury Bills and PIBs picked up by the Commercial banks in May and June totaling Rs 1,900 billion and Rs 660 billion respectively-representing an additional budget deficit of 6.67% of GDP in just three months!
All the estimates and projections that had been made by these authors and other independent analysts had suggested a likely year end fiscal deficit of, at worst, 8.5% of GDP, including the component of external financing. From the data released by the SBP the total increase in domestic debt for the year indicates the deficit for the year, based purely on the debt financing provided from domestic resources,of Rs 4,314 billion, equivalent to 11.2% of GDP(ignoring the financing contribution of external sources), suggesting that to meet the IMF program target of a primary deficit 0.6% of GDP will require an adjustment of more than 6% of GDP in one year!
As mentioned above, newspaper reports simply highlight the change in tenor of the debt owed by the government to the State Bank- its shift from the short to long-term category. But this merely represents a change in classification without impacting the level of this debt. Moreover, the same reports lament the increase in the cost of debt servicing, missing the rather basic point that there is literally no additional cost to the Government of this change. The higher interest cost that will be borne by the Government will become the income of the State Bank which will then end up in Government (as owner of the SBP) coffers as non-tax revenue, that is, profit of the SBP!
The Ministry of Finance has to date neither released its provisional data on Fiscal Operations nor flagged to the country at large, or for that matter shared, and even more significantly, with the relevant committee(s) of the Parliament, the additional spending that took place in the last quarter which resulted in an increase of such proportions. No information, let alone details, is available for public consumption to date. We are none the wiser how this additional debt was utilized- was it employed to settle some of the Circular debt and other quasi-fiscal debt or used to discharge other obligations? There could be surprises on this account in the not too distant a future. Meanwhile, there is grave concern about the apparently unbelievable increase in Government debt andthe size of the budget deficit in 2018-19.
The authors are former Federal Minister and Governor of the SBP respectively.
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Domestic Debt (Rs in billion)
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Year ended Rs billion % of GDP Increase Increase (c-b) Increase (c-a) Domestic Financing
(% of GDP) (% of GDP) (% of GDP) of Fiscal Deficit -Ministry
of Finance (% of GDP)
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June '18 (a) 16,416 47.7 1,567 (4.5%) 1,475 (4.3%)
March'19 (b) 18,170 47.3 1,754 (4.5%) 1,398 (3.6%)
June '19 (c) 20,730 53.8 2,560 (6.7%) 4,314 (11.2%)
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