FeaturedNationalVOLUME 19 ISSUE # 5

Debt dynamics in Pakistan

In October 2023, Pakistan grappled with a dynamic fiscal landscape, marked by a surge in both domestic and external debt. This overview delves into the intricate details of the country’s debt situation, exploring the sources, drivers, and implications of this financial scenario.

In the week ending December 14, annual short-term inflation soared by 43.16%, driven primarily by increases in the prices of pulses, rice, and vegetables, as reported by the Pakistan Bureau of Statistics. For the fifth consecutive week, weekly inflation remained above 41%, attributed to higher gas prices and electricity tariffs compared to the previous year. This unprecedented surge in prices has significantly diminished consumer purchasing power, highlighting the financial strain on households.

According to PBS data, prices of 19 items increased, 10 items decreased, and 22 items remained stable compared to the previous week. In October, Large-Scale Manufacturing (LSM) contracted by 4.08% year-on-year, with negative growth contributions from sectors such as textiles, paper and board, iron and steel products, electrical equipment, automobiles, and furniture.

After 14 months of contraction, LSM turned positive in August and continued to grow in September. Letters of credit (LCs) were permitted to open for a broader range of consumers and sectors from July 1, following restrictions in the previous year. The removal of import restrictions, clearance of outstanding LCs, and improved dollar liquidity resulting from an increase in State Bank of Pakistan (SBP) forex reserves are expected to contribute to an economic upturn.

Although LSM remained negative in October, with 13 out of 22 sectors experiencing negative growth, including beverages (-8.16%), wearing apparel (-1.83%), and petroleum products (-8.19%), there is optimism for economic recovery. The overall LSM shrank by 0.44% in the first four months of the current fiscal year compared to the previous year.

In October, the textile sector saw major negative growth in yarn (3.74%), cloth (5.90%), and garments (1.83%), while nominal growth was reported in the production of other products. In the food group, wheat and rice production declined, but cooking oil, blended tea, and vegetable ghee production increased. Petroleum products registered negative growth in October, with a decline in petrol (14.88%) and high-speed diesel (9.68%) production. Kerosene production, however, grew by 39.27%. Notably, iron and steel production, as well as electrical equipment production, experienced declines in October.

The auto sector faced a substantial 58.31% slump in October, with decreases in the production of almost all types of vehicles. The finance ministry attributed this performance to significant increases in input prices and tighter auto finance. Car production and sales decreased by 52.8% and 47.4%, while trucks and buses production and sales decreased by 54% and 45%. In contrast, tractor production and sales increased by 55.1% and 86.8%.

The sales of petroleum products declined by 18% to 5 million tonnes in the first four months of the fiscal year 2023-24, compared to 6.2 million tonnes in the same period last year. In October, oil sales recorded a 24% year-on-year decrease.

According to the State Bank of Pakistan (SBP), the central government’s total debt increased by nearly a quarter year-on-year to Rs62.48 trillion in October 2023. The majority of the debt, standing at Rs40.41 trillion, represented a 24.12% year-on-year growth and a 1.79% month-on-month increase, comprising Rs31.3 trillion long-term debt and Rs8.99 trillion short-term debt. The remaining Rs22.07 trillion constituted external debt, primarily sourced from long-term loans. The external debt witnessed a YoY growth of 25.03% and a marginal MoM increase of 0.01%.

The year-on-year surge in the debt burden can be attributed to borrowing from both domestic and foreign channels to address the fiscal deficit. Within the category of long-term domestic debt, Pakistan Investment Bonds (PIBs) accounted for Rs23.07 trillion, reflecting a YoY increase of 19.89% and a MoM rise of 1.51%.

In the short-term domestic debt, Market Treasury Bills (MTBs) totaled Rs8.91 trillion, marking a YoY uptick of 32.83% and a MoM increase of 1.15%. Borrowing through Naya Pakistan Certificates witnessed a YoY growth of 25.23% and a MoM increase of 6.69%, reaching Rs128.8 billion in October 2023. The government’s overall domestic debt and liabilities experienced a YoY growth of 23.44% in October 2023, reaching Rs41.033 trillion. This growth was driven by the issuance of bonds and treasury bills, while unfunded debt and domestic liabilities showed a decline.

The key contributors to domestic debt growth were permanent debt and floating debt, which increased by 24.22% and 32.9% YoY, respectively. Permanent debt, encompassing federal government bonds, SBP’s on-lending against SDRs allocation, prize bonds, and market loans, amounted to Rs28.033 trillion. Floating debt, comprising market treasury bills, reached Rs8.988 trillion.

Conversely, the government’s unfunded debt and domestic liabilities saw a YoY decrease of 7.42% and 8.85%, respectively. Unfunded debt, encompassing saving schemes, stood at Rs2.882 trillion. Domestic liabilities, including deposits of national savings centers, postal life insurance, and employees’ provident fund, amounted to Rs623.39 billion. In October 2023, the government also secured Rs377.8 billion in foreign currency loans and Rs128.81 billion through Naya Pakistan Certificates, indicating a substantial increase compared to the same period last year.

As we conclude this examination of Pakistan’s fiscal health in October 2023, it is evident that the nation faced a substantial increase in its debt burden. Driven by a mix of domestic and foreign borrowings to offset the fiscal deficit, the rise in both long-term and short-term debt demands careful consideration. The intricate balance between debt instruments, government liabilities, and external loans underscores the complexity of the financial challenges that policymakers must navigate to ensure sustainable economic growth.