DEBT

“It is an amount of money borrowed by one party from another.”

Bonds and loans are example of debt. Many corporations use debt as method for purchases on large scale which they can’t afford under normal conditions.

TYPES OF DEBTS:

1-GOVERNMENT DEBT it can also be called as public debt, sovereign debt or national debt. It is basically the debt, which is payable by a central government.

2-DOMESTIC DEBT Government raises the amount of money by this type of debt in local currency from its own residents. Generally, it comprises of two kinds, which are Bank and Non-Bank borrowing.

3-EXTERNAL DEBT It is also called as foreign debt, it is the total debt of a country that owes to foreign creditors. The debtors can be the government, corporations or citizens of that country. It is also called as EDL (External Debts and liabilities).

DEBT MANAGEMENT

“Debt management is one of several debt-relief options for those who are struggling to keep up with a growing pile of bills each month. When you sign up for a debt management plan. You pay a single company every month instead of all of your creditors.”

ECONOMY OF PAKISTAN AND ITS DEBT MANAGEMENT

INTRODUCTION TO ECONOMY OF PAKISTAN:

In terms of purchasing power parity (PPP) Pakistan’s economy is the 27 th largest in the world. And 44th

largest in terms of nominal GDP.

Pakistan's estimated nominal GDP as of 2011 is US $202 billion. The GDP by PPP is US $838,164 million and debt-to-GDP ratio is 55.5%. Population of Pakistan below the poverty line is 12.4% (2014). And economic growth rate is 5% average per annum since 1947-2011.

The structure of GDP of Pakistan is mainly based on three sectors. Agriculture: 21.2%,

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Industry: 25.4%, Services: 53.4% (2010est.)

DEBT-TO-GDP RATIO:

It is actually the ratio of a country's government debt and its gross domestic product (GDP), and also measures the degree of indebtedness of the economy.

Low debt-to-GDP ratio shows an economy that produces and sells goods and services are enough to pay back debts without experiencing further debt.

Debt to GDP ratio of Pakistan is 55.5% average. (2011 Est.) Pakistan’s Government Debt to GDP trend since 1995 to 2014 are as follows:

Actual Previous Highest Lowest Dates Unit Frequency

64.30 64.80 87.90 54.90 1994 - 2014 percent Yearly

Debt management functions performed by:

• Ministry of Finance (EAD and FD) o EAD (Economic Affairs Division) that deals with implementation, monitoring and

record keeping. o FD (Finance Department) responsible for policy making relating to debt

• Planning Commission • State Bank of Pakistan• Central Directorate of National Saving that maintains all the relevant information on

domestic public debt raised thorough National Saving Schemes.

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• Debt Policy Coordination Office (DPCO)DEBT AND LIABILITIES OF PAKISTAN:

Condition of Debt and liabilities of Pakistan in last 5 years are as follows:

PUBLIC DEBT:

The serving of total debt which has a direct control on government revenues as well as the debt acquired from the IMF is called public debt. Pakistan’s public debt has two main parts, domestic debt (which is acquired mainly to fund fiscal deficit) and external debt (which is raised mainly to fund growth of expenditure).

Public debt on September 30, 2014 was documented at Rs. 16235 billion. It represents an increase of Rs. 239 billion in first quarter of 2014-15. Increase in debt was mainly added by domestic debt, and external debt contributed 18% in this change.

Public debt was 64.3% of GDP, representing the country’s indebtedness and overflowing the 60% ceiling, which was defined by the Fiscal Responsibility and Debt Limitation Act 2005. Government was unable to meet the quarterly limit of zero (net) budgetary borrowing from the SBP, as recommended in the SBP Act 1956, for three quarters of the year. The public debt, a burden on the exchequer, stood at 4.5 times of government revenue in FY14 and the interest payment was one-fifth of total government expenditure and for the year 2014 government expenditure was 3242656 PKR Million in 2014. And payment of interest is 648532 million.

This table shows the Public debts and its ratio to GDP of last 5 years.

2009 2010 2011 2012 2013 2014 2015Public Debt (Rs. in billion)

Domestic Debt 3860.4 4654.3 6016.7 7638.1 9521.9 10920.0 11105.6

External Debt 3,871.0 4,351.9

4,750.2 5,057.2 4,771.0 5,076.5 5,129.6

Total Public Debt

7,731.4 9,006.2

10,766.9 12,695.3 14,292.9 15,996.5 16,235.2

(In percent of GDP)

Domestic Debt 29.2 31.3 32.9 38.1 42.3 43.0 38.2

External Debt 29.3 29.3 26.0 25.2 21.2 20.0 17.6

Total Public Debt

58.6 60.6 58.9 63.3 63.6 63.0 55.8

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2009 2010 2011 2012 2013 2014565758596061626364

58.660.6

58.9

63.3 63.6 63

Public Debt in percent of GDP

Years

In p

erce

nt o

f GDP

DOMESTIC DEBT:

Domestic debt has always been essential part of a government’s borrowing strategy. Through domestic sources government borrowing is vital in stimulating investment and private savings, as well as establishes domestic financial markets. It also provides depth and liquidity to the markets. The downside risks include higher interest rates which might exploit growth, the creation of inflationary pressure in an economy, and the possible crowding-out of the private sector. Therefore, any debt strategy should balance the risks to its debt stock by focusing on a mix of both domestic and external sources while borrowing funds.

Domestic Debt in Pakistan are of three types.

o Permanent debt (medium and long-term)o Floating Debt (short-term)o Unfunded Debt (primarily made up of the various instruments available under the National

Savings Schemes)

Domestic debt was increased by Rs.1398 billion and documented at Rs.10920 billion at the end June 2014.

The quantity of permanent debt in the government’s total domestic debt stood at Rs.4005 billion as at end June 2014, recording an increase of Rs.1826 billion.

The capacity of floating debt compacted to Rs.4611 billion or 29 percent of total public debt in 2013-14 compared with Rs.5196 billion or 36 percent in 2012-13. This reduction was mainly funded by important replacement of T-bills with PIBs i.e. in mid May 2014, commercial banks holdings of PIBs were higher than T-bills holding for the first time since launching of PIBs in December 2000.

Mobilization through unfunded debt stood at Rs.157 billion during 2013-14 compared with Rs.349 billion during last year.

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Outstanding Domestic Debt - (Rs. in billion)

2009 2010 2011 2012 2013 2014 2015

Permanent Debt 685.9 797.7 1,125.6 1,696.9 2,179.2 4,005.3 4,253.3

Floating Debt 1,904.0 2,399.1 3,235.4 4,143.1 5,196.2 4,610.9 4,494.4

Unfunded Debt 1,270.5 1,457.5 1,655.8 1,798.0 2,146.5 2,303.8 2,358.0

Total Domestic Debt 3,860.4 4,654.3 6,016.7 7,638.1 9,521.9 10,920.0 11,105.6

There was a noticeable shift in structure of domestic debt as share of permanent debt expanded to 37% of total domestic debt at the end of 2013-14 compared with 23% last year. Correspondingly, the share of floating debt dropped from 55% of total domestic debt to 42% as at end June 2014.

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EXTERNAL DEBT:

Pakistan’s External Debt and Liabilities (EDL) comprises all foreign currency debt contracted by the public and private sector as well as foreign exchange liabilities of State Bank Pakistan.

Annual debt have increased since 2008-09 and stood at US$ 7,697 million in 2013-14. An amount of US$ 1,528 million of multilateral debt, together with US$ 3,182 million of the IMF loans, accounted for most of these obligations. This was the first time Pakistan made such large repayments of debt in a single year.

Servicing of EDL fell by US$ 350 million in first quarter of 2014-15 compared to the same period last year and recorded at US$ 2,159 million. Out of this total, principal repayments were US$ 1,215 million and interest payments were US $244 million, whereas an amount of US$ 700 million was rolled over. Among the principal repayments, US$ 349 million of multilateral debt and US$ 520 million of IMF accounted for most of the share.

ECONOMIC COMPARISON OF PAKISTAN 1999–2008:

.

Indicator 1999 2007 2008 2009 2015GDP $75 billion $160 billion $170

billion$185 billion $272.136 billion

GDP Purchasing Power Parity (PPP)

$270 billion

$475.5 billion

$504 billion

$545.6 billion

$928.43 billion (PPP,2015)

GDP per Capita Income

$450 $925 $1085 $1250 $1513

Revenue collection Rs. 305 billion

Rs. 708 billion

Rs. 990 billion

Rs. 1.05 trillion

Rs 2.65 trillion

Foreign reserves $1.96 billion

$16.4 billion

$8.89 billion

$17.21 billion

$17.7 billion

Exports $8.5 billion

$18.5 billion

$19.22 billion

$18.45 billion

$30.414 billion (2013–14 est.)

Textile Exports $5.5 billion

$11.2 billion

– –

KHI stock exchange (100-

Index)

$5 billion at 700 points

$75 billion at 14,000

points

$46 billion at 9,300 points

$26.5 billion at

9,000 pointsForeign Direct

Investment$1 billion $8.4 billion $5.19

billion$4.6 billion $0.709 billion

External Debt & Liabilities

$39 billion $40.17 billion

$45.9 billion

$50.1 billion

$56 billion

Poverty level 60% 43% 37% 29% 17%Literacy rate 45% 53% 59% 61% 58%Development

programsRs. 80 billion

Rs. 520 billion

Rs. 549.7 billion

Rs. 621 billion

Rs758 billion

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DEBT AND LIABILITIES IN 2015:

As of March 2015, the total debt liabilities of the country stood at Rs19299.2 billion. Every Pakistani now owes a debt of about Rs101338. This figure was Rs90772 in 2013. It was estimated at Rs80894 in 2012 and was only Rs37170 in early 2008.

The debt-to-gross domestic product (GDP) ratio stands at 66.4%, in which foreign debt is Rs6.4 trillion and domestic debt is Rs12 trillion.

The external debt servicing reached close to $7 billion in fiscal year 2014, which is almost 50% of the current reserves of the State Bank of Pakistan.

The country paid $6.820 billion in debt servicing in FY15, including $5.910 billion as principal amount and $915 million in interest payments. Worryingly, 47% of whatever the government generates in revenue is going to pay off debt against 44% in the previous year.

Prime Minister Nawaz Sharif during his election campaign made tall claims that on assuming power he will get rid of the ‘cancer of debts’ and promised to break the ‘begging bowl’, however, there is little evidence of measures towards freedom from debt.

The government proved no different from its predecessors and started knocking on the doors of international lenders even more vigorously. In a country where 60% of the population lives below the poverty line and 58% faces food insecurity, this additional burden means more miseries for the generations to come.

FORECASTING OF DEBT RATE TO GDP:

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COMPARISON WITH ANY OTHER COUNTRY:

INDIA GOVERNMENT DEBT TO GDP:

To compare it with another neighboring developing country we take the example of India and its Government debt to GDP ratio for the past several years.India recorded a Government Debt to GDP of 66.10 percent of the country's Gross Domestic Product in 2014. Government Debt to GDP in India averaged 73.66 percent from 1991 until 2014, reaching an all-time high of 84.30 percent in 2003 and a record low of 65.80 percent in 2013. Government Debt to GDP in India is reported by the Ministry of Finance, Government of India.

India Government Last Previous Highest Lowest Unit

Government Debt to GDP 66.10 65.80 84.30 65.80 percent

Government Budget -4.50 -4.90 -2.04 -7.80 percent of GDP

Government Budget Value -4112.46 -3785.63 -94.06 -6025.34 INR Billion

Government Spending 3560.58 3100.18 3560.58 735.82 INR Billion

Government Revenues 5907.38 5133.69 10994.42 -3.07 INR Billion

Fiscal Expenditure 10216.20 9105.45 16447.61 136.55 INR Billion

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CHINA GOVERNMENT DEBT TO GDP:

China recorded a Government Debt to GDP of 41.06 percent of the country's Gross Domestic Product in 2014. Government Debt to GDP in China averaged 33.93 percent from 1995 until 2014, reaching an all-time high of 41.06 percent in 2014 and a record low of 19.99 percent in 1997.

China Government Last Previous Highest Lowest Unit

Government Debt to GDP 41.06 39.38 41.06 19.99 percent

Government Budget -2.10 -2.10 0.58 -3.05 percent of GDP

Government Budget Value -4982.00 944.00 8066.64 -15554.19 CNY HML

Government Spending 151662.00 140212.10 151662.00 68.10 CNY HML

Government Revenues 11087.00 14435.00 16203.42 138.36 CNY HML

Fiscal Expenditure 16069.00 13491.00 25353.67 138.60 CNY HML

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PAKISTAN GOVERNMENT DEBT TO GDP:

Pakistan Government Last Previous Highest Lowest Unit

Government Debt to GDP 64.30 64.80 87.90 54.90 percent

Government Budget -5.00 -8.00 8.80 -8.00 percent of GDP

Government Budget Value

-1388719.00

-1833864.00

20.00 -1833864.00

PKR Million

Government Spending 3242656.00 3047404.00 3242656.00 33522.00 PKR Million

Government Revenues 4119.95 3831.01 4119.95 181.80 PKR Million

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ISSUES IN DEBT MANAGEMENT

DEBT TRAP AND PRIMARY SURPLUS:

This is a condition in which there is no money to deal past debt and it is necessary to take loans to come across the outstanding debt. This leads ultimately to a crippling cycle and rapid accumulation of debt.

In the setting of a government, this implies it ought to have enough incomes to cover all non-interest related use. That is, there ought to be a “Primary Surplus”. This surplus can then be utilized for making interest installments. If so, then it can be said that the nation is not in an 'obligation trap'.

The federal and provincial governments of Pakistan did create a ‘Primary surplus' for a large portion of the years up to 2013-14. From that point forward there has been a primary deficit, suggesting that we have entered the 'debt trap'. This deficiency crested at right around 4% of the GDP in 2012-13. Credit is because of the government of PML (N) who has brought it down to under 1% of the GDP in its first year. In any case, all the more should be done to break out of the 'debt trap'. Concerning issue of outside debt sustainability various markers have been utilized. A popular measure is the ratio of external debt and liabilities to total exports. In 2006-07 it was 237% which rose to 244% by 2012-13. The ratio has risen sharply to 261% in 2013-14, because of a peak in net external borrowing during the year of $5.6 billion. Other indicators also generally point to growing problems of servicing external debt.

EXTERNAL DEBT SUSTAINABILITY:

The major issue is one of external debt sustainability. The MTDS (Medium Term Debt Strategy) suggests the initiation of relatively high cost Eurobonds annually. However, the policy should be to only borrow externally up to the level which certifies that reserves do not decline. Therefore, Eurobonds should not be seen as a regular source of borrowing, but only as a last option.

The ongoing hiatus of the IMF program means that unless it becomes operative once again there could be serious problems in repayment of external debt this year. Accessing the international capital market and receiving program assistance could also become more problematic. The question is how will the external financing needs of over $10 billion in 2014-15 be met if the Fund’s program of Pakistan flounders?

The government has pinned its hopes on receiving large external financing of $34 billion from China for energy and other infrastructure projects. While this will add substantially to power generation capacity, it will lead to a big increase in the external debt and also have implications on the balance of payments due to amortization payments, repatriation of profits and cost of coal imports. For external debt sustainability, exports will have to show a corresponding increase from the additional supply of power. Otherwise, external debt sustainability will become a very serious issue.Overall, the MTDS of the government has to be changed to have a more long-term focus, with emphasis on projecting external debt obligations and their servicing.

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STEPS TAKEN FOR DEBT MANAGEMENT

FISCAL RESPONSIBILITY AND DEBT LIMITATION (FRDL):

The National Assembly had passed the Fiscal Responsibility and Debt Limitation (FRDL) Act in 2005, in order to place a ceiling on the level of deficits and borrowing. According to the Act, total public debt should not exceed 60% of the GDP. At the end of 2013-14, it stands at 64.3% of the GDP, according to the SBP. Also, a revenue surplus must be generated. Instead, despite some improvement, there was a revenue deficit of 1.4% of the GDP in 2013-14.

Therefore, the message is clear. The burden of debt is too large and the fiscal deficit has to be brought down. If, in fact, the deficit is restricted to below 5% of the GDP in 2014-15 then we will come close to meeting the requirements of the FRDL. However, the first quarter has not been promising. FBR has shown a growth rate of only 13% in revenues as compared to the target of 24%. This threatens to increase the size significantly of the fiscal deficit in 2014-15.

MEDIUM TERM DEBT STRATEGY (MTDS):

Turning to the strategy for public debt management in coming years, the Ministry of Finance has formulated a Medium Term Debt Strategy (MTDS) in April 2014. The salient features of the strategy are raising the maturity profile of domestic debt; widening the investor base of T-bills, PIBs and Ijara Sukuk bonds; focusing on concessionary borrowing from multilateral/bilateral donors; annually floating Eurobonds up to 2017-18 and achieving centralization and transparency in debt management operations. Successful execution of the MTDS will require generation of primary surpluses of at least one to two percent of the GDP. This implies a vigorous mobilization effort and strict economy in expenditure. Raising the maturity profile reduces the risk of rollover of short term debt but it adds to the cost of debt servicing. The composition of domestic borrowing should reflect expectations about future interest rates. If these are expected to fall, then more short-term debt may be a preferred option.

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PROBLEMS IN CURRENT DEBT MANAGEMENT PRACTICES

Poor coordination and information flow between debt management agencies. Outdated data management systems and limited computer access across different departments Long term planning and project feasibility are the least priority at the level of policy making and

implementation Decisions regarding debt issues are mostly based on personal inclinations, political motives and

vested interests. Debt management in Pakistan - not an integrated part of overall macroeconomic policies

especially the fiscal and monetary policies. Fiscal consolidation lost (missed revenue targets with rising expenditures) Failure of FRDL Act (on account of Government’s inability to contain the revenue deficit) Debt management- in spite of addressing these core issues work under subservience to political

influence and bureaucratic mindset. Lack of adoption of strict guidelines for effective debt management Proposals put forward by debt reduction Committee in 2001 are still not implemented seriously DPCO not playing the crucial role of managing debt as was envisaged under FRDL Act 2005

CONSEQUENCES OF POOR DEBT MANAGEMENT

The increase in the debt stock and rise in the debt burden in the recent past has negatively affected the economy.

Eroding the purchasing power through a hike in inflation thus negatively influencing the whole economy especially the poor segment of society.

Diverting resources from development or productive activities to non-development expenditures.

Economic growth also being affected (insufficient investment, increasing waste and corruption and funds not being allocated on high economic and social return projects).

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POLICY RECOMMENDATIONS

Implementation of sensible debt management strategy- it should not only focus on exploring the inexpensive and effective bases of financing (both domestic and external), but also should prudently observe the correct use of debts to check if the money is being properly used.

The structure of domestic debt should be changed by the growth of domestic capital markets for long term government securities so that the heavy and growing reliance on short term money market borrowing which is unwanted and expensive should be reduced.

Implementation of a rule should be based on fiscal policy. Better policy construction and institutional strengthening in various entities involved in

management of debt Professional advice needed on matters relating to domestic and external borrowing Well defined Debt strategy should be adopted. Free of bureaucratic and political pressures. An improvement in the macroeconomic environment of the country should be focused.

(revenue generation, an improvement in the saving rate , investment in both human & physical capital, improvement in productivity of public as well as private sector through better efficiency, better governance and downsizing )

An expansion of government revenues and exports while eliminating the excess of current government expenditures over revenues and improvement in the quality of resource use in public sector.

Enforcing the strategies effectively as steps were taken before as well but failed to be effectively implemented and therefore failed to bring about any real change in the debt Position of Pakistan.

REFERENCES

Debt policy statement 2014-15 Pakistan Economic Survey 2014-15 Economic Survey 2010-11: Country sinks deeper into debt by The Express Tribune. Finance.gov.pk, Tradingeconomics.com, Wikipedia, and brecorder.com Debt Management in Pakistan by Samina Shabir Repaying our debts by Sakib Sherani (Courtesy Daily Dawn). Issues in the management of Pakistan Debt by Hafiz Pasha. Pakistan debts by Muhammad Akmal Policy statement: Govt. admits violating Debt Limitation Act By Shahbaz Rana Effective debt management strategy can ease mounting burden By Mubashir Akhtar

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