Exchange rate losses increase public debt by Rs1,200 billion

ISLAMABAD: Exchange rate losses have increased the public debt by around Rs1,200 billion, according to Fiscal Policy Statement 2018-2019 released by the Ministry of Finance.

 

 

 

“Revaluation losses due to appreciation of international currencies against US Dollar and depreciation of Pak Rupee against US Dollar increased the total public debt by around Rs 1.2 trillion,” it said.

According to the policy statement, the increasing twin deficits (fiscal and current account) continued to accelerate the pace of debt accumulation during 2017-2018.

Total public debt was recorded at Rs24,953 billion by end June 2018, showing an increase of Rs3,544 billion during
the year.

Main drivers of this increase were:

— Budget deficit reached its highest level during last five years registering at Rs2,260 billion or 6.6 percent of GDP. This higher fiscal deficit increased government reliance on borrowing from domestic and external sources, especially from the domestic banking sector. The government borrowed Rs1,120 billion from banking sources, Rs353 billion from non-bank sources while external borrowing for the financing of budget deficit stood at Rs785 billion;

— Revaluation losses due to appreciation of international currencies against US Dollar and depreciation of Pak Rupee against US Dollar increased the total public debt by around Rs1.2 trillion; and

— Rest of the increase in total public debt was on account of increase in credit balances of the government with the banking system.

It said that similar to last year, composition of public debt in terms of maturity profile continued to witness unfavorable changes during 2017-2018.

The government relied mainly on short-term domestic borrowing while demand for medium to long term government securities remained subdued in anticipation of change in the interest rates, inflation and liquidity conditions.

On external public debt front, most of the loans were contracted through commercial sources mainly on floating rates.

These factors contributed towards breach in few indicative ranges for public debt risk indicators as defined in Medium Term Debt Management Strategy (MTDS).

— The upper range for the risk indicator “Domestic Debt Maturing Within a Year” was 65 percent while this indicator reached at 66.3 percent at end June 2018;

— Similarly, upper range for “Domestic Debt Re-Fixing in 1 Year” and “Public Debt Re-Fixing in 1 Year” was envisaged at 65 percent and 55 percent respectively while these indicators stood at 66.6 percent and 55.5 percent respectively at end June 2018.

The ministry of finance said that one of the objectives of MTDS is to facilitate the development of debt capital markets. A well-developed debt market is essential to reduce financial risks of the overall economy, provide the government with a non-inflationary source of finance, create a well-balanced financial environment and promote economic growth.

Government is taking various steps to provide an efficient and liquid secondary debt markets to the investors.

During first quarter of 2018-2019, total public debt reached Rs25,783 billion at end September 2018 registering an increase of Rs831 billion.

The bifurcation of this increase is explained below:

— Domestic debt registered an increase of Rs504 billion while government borrowing for financing of fiscal deficit from domestic sources was Rs331 billion, indicating an increase in government credit balances with the banking system during the period under review; and

— Increase in external public debt contributed Rs327 billion to total public debt while government borrowing for financing of fiscal deficit from external sources was around Rs211 billion. This differential was primarily due to revaluation losses on account of depreciation of Pak Rupee against US Dollar. Public debt per capita stood at Rs120,099 during 2017-2018.

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