Achi news desk-
Pakistan is too big to fail, but it should find a way to reduce its public debt, which is close to 80% of GDP and growing rapidly. Given Pakistan’s weak fiscal position and unaffordable levels of debt, it should explore the option of major domestic debt restructuring (DDR) before another crisis erupts. It can save as much as $3.5 billion, or 1% of GDP, by reducing the interest paid on government debt.
Considering Pakistan polarized politics and terrorist threats , it seems highly unlikely that Pakistan would be able to raise funds from the international debt markets soon given its low credit rating. Moody’s Investors Service (Moody’s) noted in its report on February 27th that the funding “ca” [rating] reflecting Pakistan’s large debt burden and very weak debt affordability. So it is very optimistic to assume that Pakistan would be able to raise money from Panda bonds as the finance minister pointed out recently. Last year, the only developing country to sell Panda bonds was Egypt, but only because the RMB 3.5 billion ($478 million) issue was backed by the guarantees of two AAA-rated multilateral banks.
Pakistan’s total public debt stood at Rs 67.3 trillion ($239 billion) on 31 Decemberst2023 and account for 74.8% of GDP 2023. Rs42.6 trillion (or 63.3pc) of this was domestic debt.
The current IMF estimate of government revenue is 12.5% ​​of GDP and expenditure at 20.2%. The main reason for the gap is the interest paid on the debt which the IMF considers to be around 8% of GDP. Interest on domestic debt currently accounts for more than 80% of the total interest paid by the federal government. The net federal revenue for the first half of FY2023-24 was insufficient to cover even the interest on the loans, which climbed 64% to a record Rs4.2 trillion.
Pakistan’s total public debt stood at Rs 67.3 trillion ($239 billion) on 31 Decemberst2023 and account for 74.8% of GDP 2023. Rs42.6 trillion (or 63.3pc) of this was domestic debt.
Pakistan has relied heavily on electricity, gas and petroleum tariffs and energy taxes to increase its revenue on the one hand and through heavy borrowing on the other. Some commercial users pay for natural gas at rates even higher than those in the international markets. This is not sustainable and is damaging the economy. These indirect taxes have contributed greatly to Pakistan’s inflation, which is currently around 20%.
The staggering increase in loans and debt servicing is mainly due to the government’s failure to increase the tax to GDP ratio, higher interest rates and currency depreciation.
Given Pakistan’s long-term failure to increase its tax base, it is difficult to be optimistic about significant improvement in the short term. Therefore, in the near future, the government must reduce its borrowings to create fiscal space.
Domestic debt of Rs42.88 trillion includes Rs 25.69 trillion (60%) in Pakistan Investment Bonds (PIB) and treasury bills of Rs8.29 trillion. It is estimated that the local banks and the central bank together hold about Rs20 trillion in PIBs or 80% of the total.
The banks listed on the stock market were made net profit of Rs544.43 billion during 2023, reflecting a huge growth of 81.95% compared to their total earnings in the previous year. Almost half of the gross interest income of the listed banks was attributable to PIBs.
Pakistani banks are in a fairly good financial position to withstand the cost of restructuring.
Restructuring floating rate bonds can help the government reduce its debt servicing costs. This could take the form of conversion to fixed rate bonds with longer maturities and lower coupon rates and with the specific objective of reducing debt servicing by Rs1 trillion annually.
Pakistani banks are in a fairly good financial position to withstand the cost of restructuring. Their return on equity was 26% in line with the IMF, which noted in its January 2024 review: “The banking sector remains well capitalized and profitable with improving solvency ratios. The capital adequacy ratio was strengthened and NPLs, although increasing slightly, remained well provisioned.”
There is a case for a serious and careful evaluation of domestic debt restructuring because it is difficult to see another way of reducing debt servicing costs to create some fiscal space and the banking industry has benefited disproportionately from the high yields in the securities government and it is strong. enough to bear this cost if the restructuring is done on the right track ensuring the least possible impact on regulatory capital.
The experience in Sri Lanka shows that domestic debt restructuring is easier to do than external debt restructuring and can be done without damaging investor confidence.
An improvement in the government’s fiscal position could help the country improve its credit rating and thereby its ability to raise funds.
