The government of Pakistan has come up with a plan to raise debt worth Rs5.87 trillion through offering sovereign securities to commercial banks over the period of next three months.
According to the central bank, these treasury bills (T-bills) and Pakistan Investment Bonds (PIBs) are being issued in order to pay off a maturing debt of Rs5.15 trillion. It must be noted that where the funds will be partially used to pay off the debt, it will also lead to an additional net Rs720 billion to the public debt portfolio within the time span of three months.
The State Bank announced the benchmark interest rate to be increased to 7.25%. The spike of 25basis points (bps) in the monetary policy rate will make the borrowing more expensive which in turn will increase the debt burden on the citizens.
Economist Dr. Ashfaque Hasan Khan noted “An increase of one percentage point in the benchmark interest rate increases interest payment (debt servicing) by Rs180 billion,”.
Khan is the Dean and a Professor at the National University of Sciences and Technology (NUST). He added that the addition of Rs1.8 trillion had been made to the foreign debt component within the total public debt owing to the depreciation of the local currency during the last five months.
The local currency has faced a devaluation of Rs18.53 from the 22-month peak of Rs152.28 which it had achieved in May 2021. The rupee closed at Rs170.8 against the US dollar on Tuesday.
The planned new borrowing entails a breakdown of the government borrowing Rs5.05 trillion by issuing three to 12-month T-bills against maturing papers of Rs5.1 trillion from October to December 2021.
In a similar way, the government will raise Rs300 billion via floating three to 30-year PIBs (at a fixed rate of return (ROR) against the maturity of bonds which were issued earlier, worth Rs55 billion during the three months.
The government will further borrow Rs225 billion by issuing three to five-year PIBs at a floating (variable) interest rate against zero maturity because the floating rate bonds are relatively new.
Head of Research at Pak-Kuwait Investment Company Samiullah Tariq said, “The issuance of government debt securities at a floating rate is aimed at reducing the cost of borrowing,”.
The government is also progressively substituting its short-term debt (T-bills) with long-term borrowing (PIBs).
Tariq added, “This measure is aimed at making the debt profile sustainable, getting enough time to implement economic reforms and overcoming the challenge of increasing tax collection by the time long-term papers of up to 30 years reach maturity,”.
The government intends to utilize the net new debt of Rs720 billion to finance its budget expenditure which includes development projects such as roads and dams under the Public Sector Development Programme (PSDP).
Funds will also be used to partially finance its defense requirements while issuing funds to various ministries in the form of debt.
Tax collection
The tax revenue collection has proven to be much lower than the urgently required funds for the current fiscal year 2021-22, hence, the government plans on financing its expenditures through the debt.
The economic growth target for the ongoing fiscal year set by the government is 4.8%. A budget of Rs8.5 trillion has been announced for that purpose.
The targeted revenue collection of Rs5.82 trillion along with the borrowing worth Rs3.42 trillion will be financing the outlay.
The fiscal deficit target has been set at Rs3.42 trillion or 6.3% of GDP for the current fiscal year against last year’s target of 7%.
It plans on collecting 17.4% higher tax revenue through the Federal Board of Revenue (FBR) to Rs5.82 trillion in FY22 in comparison to Rs4.96 trillion in FY21.
