Pakistan's debt sustainability indicators worsen, public debt rose significantly in past 6 months

Islamabad [Pakistan], April 3 : Pakistan is in the middle of a deep economic crisis amid steep currency devaluation and interest rates hikes with its major debt sustainability indicators witnessing marked deterioration during the first half of this fiscal year, according to semi-annual debt bulletin of the finance ministry, reported The Express Tribune.
The July-December 2022 report showed that the share of external public debt rose in the past six months, while the average time of maturity and period of resetting the interest rates have further shortened, the report said.
The Express Tribune showed that the share of external debt in the total public debt rose from 37% in June to 37.2% by December, heightening the currency risks simultaneously with the rupee sinking and foreign countries shying away from extending loans.
This is synchronous with interest rates at historic highs and the currency devaluing by 56 per cent since the incumbent government came into power a year ago, reported The Express Tribune.
According to the report, "Large external payments in the wake of low foreign exchange reserves can pose liquidity problems and even destabilise the exchange rate which in turn, can increase the burden of external loans measured in local currency."
The debt office publishes a semi-annual debt bulletin containing information about debt stocks, debt operations and the sources of change in the debt stocks on a semi-annual basis.
According to the debt bulletin, in dollar terms, Pakistan's total public debt stood at USD 233 billion by December, including USD 86.6 billion in external public debt. The country needs to service 28 per cent of its debt in just one year, which is quite a big chunk and will expose the nation to all types of debt-related risks.
The floating rate domestic debt is now Rs 22.5 trillion or 68 per cent of domestic debt, which is poisonous due to interest rates at a record 20 per cent.
In rupee terms, public debt jumped to Rs 52.7 trillion - an addition of Rs 3.6 trillion during the first half of the fiscal year. The rupee depreciation added Rs 2.3 trillion to public debt in six months, contributing a rise of 63 per cent to the debt during this period, the report said.
The interest expenses amounted to Rs 2.27 trillion during the first half of the fiscal year, equal to 72 per cent of the surge in public debt during this period, reported The Express Tribune.
Although the government is not inclined towards debt restructuring, worsening indicators coupled with a lack of adequate foreign funding suggest that Pakistan will soon have to embrace this path.
The finance ministry stated that containing exposure to external debt is important to manage the exchange rate risk. "The depreciation of the rupee over the last four years against international currencies has resulted in a higher value of external debt when translated into local currency."
The report also showed that the average time of maturity of the domestic loan reduced from four years to three and half years in one year. This, too, was riskier and would keep the country dependent on commercial banks out to exploit the situation, reported The Express Tribune.
"Given the prevailing interest rate environment, the demand for domestic debt remained mostly skewed towards short to medium-term government securities," said the report.
In yet another significant deterioration, the fixed-rate debt reduced from 26 per cent to just 22.6 per cent of the domestic debt, increasing the interest rate risks. This is coming at a time when the central bank is going to raise interest rates significantly, reported The Express Tribune.
A total Rs 17.1 trillion or 52 per cent of government debt is held by commercial banks, now a source of exploitation. Despite exchange rate manipulation, the government seems unable to impose penalties on some of these banks. Roughly, Rs15 trillion or 28% of the total debt will mature in one year, which has to be refinanced. This includes a portion of external debt, it said.
Meanwhile, Finance Minister Ishaq Dar said on Friday that the country should learn to live with or without the IMF - a remark that has created confusion about the government's intentions towards reviving the derailed USD 6.5 billion bailout package, reported The Express Tribune.
The finance ministry said that due to the short tenure of foreign commercial bank loans and deposits from friendly countries, there was a reduction in the average time-to-maturity of external debt.