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Photo Source: Pakistan Economic Survey Report 2023-2024
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CWA # 1385, 17 July 2024
Pakistan Reader
PR Review I Pakistan Economic Survey 2024 (Part-IV)| Public Debt in Pakistan: Five Takeaways

  Vaneeta

On 11 June, Finance Minister Muhammad Aurangzeb released the Pakistan Economic Survey 2023-2024 which gave an overview of the major developments in the current fiscal year. On public debt, the survey revealed that the total public debt of Pakistan was recorded at PKR 67,525 billion at the end of March 2024, which is an increase from PKR 62,8811 billion recorded in June 2023. Following are five takeaways from the chapter.
 
1. Higher domestic borrowing as compared to from external sources
During the first nine months of FY 2024, the government financed approximately 88 per cent of its fiscal deficit through domestic markets and the rest of 12 per cent from external sources. The domestic debt stood at PKR 43,432 billion and the external debt at PKR 24,093 billion in March 2024. In June 2023 the domestic debt was PKR 38,810 billion and external debt was PKR 24,071 billion which shows that there is not a big increase in external debt, however, a significant increase in domestic debt. This is because the government relies more on domestic bonds and securities instead of external sources in order to avoid risk factors such as exchange rate and international interest rate.
 
Domestic debt has three categories: The first is permanent debt which is medium and long-term instruments such as (Pakistan Investment Bonds (PIB) and Government Ijara Sukuk (GIS).72 per cent of the domestic debt portfolio was made up of permanent debt, which was valued at PKR 31.2 trillion at the end of March 2024. This amount had increased by PKR 5.7 trillion in the first nine months of the current fiscal year. The second is floating debt which includes short term instruments such as Treasury Bills (T-bills). T-bills stood at PKR 8.5 trillion which is 20 per cent of total domestic debt.  The third category is unfunded debt which is primarily made up of various instruments available under National Savings Schemes. This stood at PKR 2.8 trillion which is 6 per cent of total domestic debt.
 
2. Amendments implemented to make debt management transparent and competitive
The government issues three types of securities to raise debt which are the Treasury Bills (T-bills), Pakistan Investment Bonds (PIBs), and Government Ijara Sukuk (GIS). The government took some measures to make debt management transparent and competitive which included amendments to the Treasury Bills Rules, 1998, and Ijara Sukuk Rules, 2008. In addition to the three- and five-year Ijara Sukuk instruments that were available, the government conducted its first auction of 1-year fixed rate Ijara Sukuk on the Pakistan Stock Exchange (PSX) in December 2023 to expand the shariah-compliant instrument base and provided investors more options in Islamic investments.
 
3. A significant rise in public debt over the years
Public debt in Pakistan has shown a significant upward trajectory over the years which shows the country's current financial challenges and need for borrowing. Public debt saw a substantial increase from PKR 24,953 billion in June 2018 to PKR67,525 billion by March 2024.This rise in debt can be attributed to a few factors such as persistent fiscal deficits, high expenditures, and limited revenue generation. The government has increasingly relied on both domestic and external borrowing to finance its budgetary needs, manage debt repayments, and support economic activities. However, in the first nine months of the current fiscal year, the public debt was reduced by 54 per cent as compared to the increase in the same period of last year mainly due to the exchange rate stability.
 
4. High-interest expenses became a burden
Pakistan is facing a major fiscal difficulty because of the high interest rate charges. This was especially noticeable in the first nine months of FY 2024 when interest expenses increased to PKR 5,517 billion. The main cause of this sudden surge is the high cost of borrowing, both domestically and internationally. Interest expenses of domestic debt was PKR 4,807 billion which is 55 per cent higher than last year.  The problem of higher interest expenses has been made worse by relying on floating rates debt instruments, which reset at higher rates. As a result, debt servicing expenses have increased significantly.
 
5. A sense of diversity in sources of external debts
External debt in Pakistan has various sources to balance tenure and cost. Loans from different multilateral development partners like the IMF make up 53 per cent of the total external debt which gives them more favourable terms and lower interest rates. In addition, deposits from friendly countries like China and Saudia Arabia to Pakistan amount to 10 per cent which is mostly short-term and used for BOP (Balance of Payment) and budgetary support. Pakistan also engages in international capital market transactions, including Eurobonds and international sukuk, which represent 9 per cent of the external debt and are long-term with market-based interest rates. This diversified debt structure helps in managing repayment schedules and mitigating risks associated with foreign exchange and interest rate fluctuations.

Public Debt
What did the Economic Survey say in the 2022 and 2023 reports?

Pakistan Economic Survey 2022-23
The economic survey 2022- 2023 revealed a total public debt of PKR 59,247 billion which shows a similar trend of rise from its previous year as in the 2023-2024 survey. In addition, a previous survey showed that the government relied on domestic debt more than external debt which is visible in PKR 35,076 billion compared to PKR 24,171 billion. However, the difference between external and domestic debt has increased according to the 2023-2024 survey. The depreciation of Pakistan rupee vis-a`-vis US Dollar by around 39 per cent led to a significant increase in the stock of external public debt when converted into Pak-Rupee in the first nine months of FY23 as compared to a decrease in FY24. Regarding interest expenditures, its reasons are mostly similar to this year’s survey such as high reliance on floating rate instruments. however, the expenditure on external debt was increased given the increase in global interest rates and depreciation of Pakistan rupees. Survey shows similar sources of external debt such as multilateral development partners (including IMF), friendly countries such as China and Pakistan government’s international market transactions.

Pakistan Economic Survey 2021-22
According to the economic survey of 2021-2022, the total public debt was PKR 44,366billion in March 2022. It shows that domestic debt has a bigger proportion compared to external debt the gap is not as high as it showed in the survey of 2023-2024. The domestic debt was PKR 28,076 billion and the external debt was PKR16,290 billion as compared to this year at PKR 43,432 billion and 24,093 billion respectively. In addition, debt from multilateral and bilateral sources cumulatively constituted around 79 percent of the external public debt in March 2022 which is now 74 per cent according to the survey of 2023-2024.

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