ISLAMABAD: At a time when debt levels are unsustainable and alarmingly high, the government revealed Friday that it will borrow additional funds over the next five years due to a greater need to reduce the fiscal deficit and keep it within the projected target.
The Director General of the Debt Division of the Finance Division, Abdul Rehman Warraich, shared these details after Parliament asked the government to explain its five-year debt management plan, the projected strategic objectives of expiration and diversification of Debt.
Rehman informed the NA Permanent Finance Committee, led by Asad Umar, that the government would borrow almost $ 22 billion from external sources by the end of June 2020, which will increase the total external public debt to about $ 98 billion. .
The government has planned to amortize almost $ 8 billion by June 2020. The DG also explained that the medium-term debt strategy (MTDS) is focusing on the projection, which the government believes can be achieved in the next five years .
The members of the standing committee expressed their apprehension regarding the measures taken in this regard.
In informing the committee, DG said that based on these flows; It was not possible for the government to meet all the strategic objectives in the next five years because the debt levels are very high. "But, we will make significant progress in our strategic objectives," he added.
The Finance Division has made long and medium term projections for internal and external debt.
At the end of last fiscal year, the internal debt was 66{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of the total public debt, while the external debt was 34{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}. The government has projected that, in the long term, the proportion of internal debt will rise to 70{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}, while that of external debt will be reduced to 30{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}.
Government aims to shift towards bilateral loans that comply with Shariah
However, the DG said that these objectives could be unattainable due to growing financing needs. This relationship, he said, will be worse in the next five years. The external debt will be 41pc by the end of fiscal year 24 and the internal debt will be 59pc, he added. The change in these proportions depends on the performance of the economy.
External debt
At the end of fiscal year 19, the multilateral / bilateral debt index was 73{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of total external debt, while the debt generated through Euro / Sukuk bonds issued in the international capital market constitutes 9{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} and Commercial bank loans offset the remaining 18{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}.
The DG said that the government could significantly reduce commercial loans and increase the debt collected through Eurobond / Sukuk from a current share of 9{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} to 14{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in total external debt over the next five years. The government wants a presence in the international capital market to ensure transparency.
The long-term objectives, projected for external debt, are very ambitious and government projects to reduce the participation of commercial banks to 12pc of the current 18pc in total external debt. "The government does not want to borrow from international commercial banks," he said while adding that the strategic objective in this regard is 5pc in the long term.
He said the government's strategy is to increase the level of indebtedness from multilateral / bilateral sources, which is concessional in nature, and raise its proportion to 80 percent in the long term. However, in the next five years, the government can only reduce participation to 73 percent of the existing 74 percent.
Internal debt
The DG said that, now, internal debt is a great challenge for the government. He said that by the end of last fiscal year, the internal debt has a short maturity period, which has forced the government to exploit in the market and refinance a large amount of internal debt.
He stated that the internal debt maturity profile improved due to the fact that almost all central bank government loans became long-term debt with a maturity period between 1 and 10 years. The government, he said, has also pledged to stop borrowing additional funds from the central bank.
Due to the new profiling, the DG said that the internal debt maturity scale has improved.
The data show that at the end of fiscal year 19, the short-term debt index was 27{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of total domestic debt with a maturity period of less than one year.
The government projects that this will be further reduced to 20pc in the next five years. The long-term projection is 15pc for short-term debt in total total internal debt.
The medium-term debt index, with a maturity period of 1 to 5 years, stood at 30pc in fiscal year 19 and is projected to remain at the same level for the next five years. The debt index, with a maturity period of more than five years, will increase to 50 percent for fiscal year 24 from 44 percent in fiscal year 19.
“We believe that in the next five years, we may not be able to achieve our strategic objectives due to limitations. We can only reduce short-term debt to 20pc, while long-term debt will be improved to 55pc of domestic debt, ”he said.
At the end of fiscal year 19, the fixed rate debt was 45{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of the total internal debt, while the variable rate debt was 55{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5}. “We would like to see the drastic change in these proportions. We have pointed out that fixed rate debt should increase to 70pc while reducing floating rate debt to 30pc in the long term. We will improve fixed rate debt to 53pc while reducing floating rate debt to 47pc in the next five years, ”explained DG.
He said that increasing the proportion of debt instruments that comply with Sharia is the government's priority.
At the moment, the 99{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} debt rises through conventional instruments, while only 1{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} comes from Shariah instruments. He added that there is a lot of liquidity available with institutions that comply with Shariah.
Over the five years, “we can see the proportion of Shariah's debt increase to 10pc from 1pc.
“As a percentage of the total public debt, the internal debt is 66 percent, almost two thirds, while one third or 34 percent is external debt.
"We believe that, in the long term, the external debt should not exceed 30pc because it creates an exposure to the exchange rate and a reimbursement burden for the government," he said.
The Director General said he did not see great opportunities for the government to achieve these goals.
Posted in Dawn, October 26, 2019
Source: https://www.dawn.com/news/1513019/debt-levels-to-remain-high-in-next-five-years-amid-widening-fiscal-gaps-lawmakers-informed