Pakistan's Debt Management Strategy

Is Pakistan’s Debt Management Strategy Informed by
International Experience?
Vaqar Ahmed,
Sustainable Development Policy Institute

Contents
2
• Situation analysis
• Key debt management issues
• Expectations from the supplementary Finance Bill
• Lessons from debt strategies of other countries

Macroeconomic Framework
3
Indicators 2017-18 R 2018-19 E
Economic Growth (%) 5.8 6.2
Investment to GDP (%) 16.4 17.2
National Savings (% of GDP) 11.1 13.4
Inflation (%) 4.5 6.0
Total Revenues (% GDP) 15.2 16.3
Government Expenditure (% GDP) 21.8 21.2
Fiscal Balance (% of GDP) -6.6 -4.9
Exports (USD billion) 24.8 27.9
Imports (USD billion) 55.9 56.9
Remittances (USD billion) 19.6 21.2
Trade Deficit (USD billion) 31.1 28.9
Current Account Deficit (USD bn) 18.0 13.3
SBP Reserves 9.8
Source: Federal Budget 2018-19, Pakistan Economic Survey 2017-18, Annual Plan (PC)

0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
8,000.0
9,000.0
Jan-16 Jan-17 Jan-18
PKRBillion
Central Government External Debt
Total External Debt Long Term Short Term
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan-16 Jan-17 Jan-18
PKRBillion
Central Government Domestic Debt
Total Domestic Debt Long Term Short Term
Central Government Public Debt
Source: Ministry of Finance/SBP

Is debt servicing capacity improving?
5Sustainable Development Policy Institute
0
5
10
15
20
25
30
35
40
45
2013 2014 2015 2016 2017
Debt Servicing/Revenue (%) Debt Servicing/GDP (%)
Source: Ministry of Finance

Will external account help debt servicing capacity?
-5
0
5
10
15
20
2013 2014 2015 2016 2017
Exports/GDP(%) Workers' Remittances (Growth %)
Current Account Deficit/GDP (%)
Source: State Bank of Pakistan

External Debt Sustainability
0
2
4
6
8
10
12
14
2013 2014 2015 2016 2017
ED/FER (times) ED Servicing/FEE (%)
Source: Ministry of Finance

Situation Analysis
8
• Unable to significantly bring down public and publically guaranteed debt
levels since FY17
– Key drivers include:
• less than anticipated revenue mobilization
• Increased provincial spending
• Pressures on federal government current expenditures
• High foreign currency denominated public debt (over 30%)

Situation Analysis
9
Factors that could keep public debt ratio significantly higher (over 75%)
– Negative shocks to real sector growth and primary balance
– Rise in global oil prices
– Rise in unit price of imports (for essential inputs)
– Adverse exchange rate shocks
– Contingent liabilities arising from losses of public sector enterprises
– New guarantees were issued for WAPDA, PHPL, SNGPL, ZTBL, PIA, SSGC,
NTDC, NHA.

Situation Analysis
10
Finance Division’s DPS 2017-18;
“Necessary amendments in Fiscal Responsibility and Debt Limitation Act were
approved by the parliament to place debt-to-GDP ratio on a firm downward
trajectory through sound fiscal and debt management. Accordingly,
• Federal Government budget deficit shall be reduced at 4 percent of GDP
(excluding foreign grants) during the period 2017-18 to 2019-20 and 3.5
percent of GDP thereafter.
• Similarly, public debt shall be reduced to 60 percent of estimated GDP until
2017-18, and thereafter a 15-year transition has been set to bring down
debt-to-GDP ratio to 50 percent”

Is FRDL Delivering?

What is the actual deficit?
12
• According to MoF deficit estimated in the budget i.e. PKR 1890 billion (4.9%
of GDP) is understated due to
– Shortfall in revenue (PKR 350 billion)
– Expenditure understated (PKR 250 billion)
– Provinces were supposed to run surplus (PKR 286 billion)
– Circular debt in energy (PKR 550 billion)
• Actual deficit according to MoF = PKR 3326 (approx. 8.5%)
• MoF aims to bring it down to PKR 2018 (5.2%) through
– Additional tax effort (PKR 183 billion)
– PSDP cut (PKR 225 billion)
– Reductions in tax exemptions (PKR 350 billion).

Is FRDL Delivering Results?
13
• Weak demand and supply side accountability measures, which should be
part of this law
• The parliament could only weakly challenge the amendments twice brought
on the floor for amending this act through use of another act i.e. Finance Act
2017. The latter was helpful for the government as the upper house of the
parliament lacks the powers to vote on a finance bill
• Any government now has the ability to change the definitions of basic debt
accounting concepts including the overall definition of public debt
• Example: Inability to appropriately forecast deficit financing needs resulted
in the federal government borrowing more than its requirement during
FY2016. Borrowed sum was kept in various banks at the prevalent interest
rate, which was lower than the cost of borrowing.

Key domestic debt management issues
14
• Fragmented debt management across
– Budget Wing
– Debt Policy Coordination Office
– Central Directorate of National Savings
• The DPCO lacks active role in the management of debt and vulnerabilities
• Debt sustainability analysis lacks evaluation.

Key external debt management issues
15
• Objectives of external debt (in overall debt strategy) not clear
– Are they for national development needs
– Or, meeting forex requirements
• Arguments from provincial governments:
– Seeking to procure own loan / grants
– Complain regarding the stifling role of Economic Affairs Division
• Arguments from autonomous bodies
– The approval procedures do not keep pace with debt market
– Cumbersome procedures for rescheduling of debt.

Can FRDL be improved?
16
• Provinces should agree on their own rule
based policy
• There should be penalty clauses for federal or
provincial governments who breach FRDL
• Monitoring system to effectively review &
monitor progress on debt including on
contingency management in the context of a
rolling medium-term macroeconomic
framework
• Optimal debt stock should be in line with
economic growth requirements
• Allow redefinition of fiscal rules on the lines
similar to 2005 law. See OGP framework
• Revisit the role of DPCO (e.g. improve role in
determining cash requirements).

Some lessons from abroad

• Kohlscheen (2010): 53 emerging economies |Munir and Mehmood (2018):
South Asian economies | Zouhaier and Fatma (2015): economies from
Africa & Middle East
• Debt increases growth till a certain point after that it adversely affects
economic growth
• Even if debt was concentrated in infrastructure; it may have led to short
term gains in growth, however in the longer run adverse affects on growth
were seen due to a pile up of government debt (which was only to be
retired through taxes or by procuring further debt).
• The most important channel through which higher debt levels were
impacting growth was public and private investment. The growth of debt
led to expectations of lesser returns. Local investors expected taxes and
foreign investors are expecting long term uncertainty.
Case of South Asia & Emerging Economies

• Very likely in low growth environments
• Low growth environment with sustained high rates of external
debt
• Default rates were lower in the case of domestic than external
debts
• External defaults triggered domestic defaults.
What matters for sovereign default?

• Scenario-I: Public external debt and debt servicing continued
to negatively affect growth - debt overhang
• Scenario-II: Public external debt and debt servicing continued
to negatively affect investment - crowding out
• Scenario-III: Both of the above.
Quality of Political Regime Matters

• Four key channels through which debt impacts growth: Investment,
TFP, interest rate and savings channel
• Successful economies tightly linked debt procurement with external
levers of growth
– For examples, the period of debt inflows was accompanied by
increase in TFP, exports, FDI
– Borrower’s capacity to service debt needs to increase over time
• They closely monitor the channels through which debt will impact
growth.
How successful economies used debt?

• In success stories, governments strictly used debt for developing
most essential infrastructure
• Debt from local sources was kept under check in order not to
reduce loanable funds for the private sector
• Own tax revenues were generated to help investments in social
sectors
• Structural problems which created sovereign losses were addressed
• The size of the shadow economy was reduced through policy and
administrative measures.
Policies that compliment prudent debt management

• Learning how international creditors force domestic creditors to share
the burden (energy consumers pay in Pakistan – CPEC related
commitment)
• Quality of political regime and how elected representatives manage
budgets can be improved through measures such as OGP.
Policies that compliment prudent debt management-II

Thank You
www.sdpi.org | www.sdpi.tv | vaqar@sdpi.org

Pakistan's Debt Management Strategy

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