Debt Reduction and Management Strategy

(A Brief Summary)
Pakistan has to face severe burden of internal as well as external loans due to
deteriorating BOP position and resultantly persistent budget deficits. The situation of
foreign loans is becoming more and more serious as its repayment is really a hard nut
to crack because repayment has to be made in foreign exchange. Pakistans foreign
reserves are too short to repay the foreign debt. According to an estimate the value of
external loans against us was $61 billion in March 2013, which is 300 times of our
foreign exchange reserves.
Total public debt (internal+ external) was Rs.155 billion in 1980 which was 66% of GDP.
In 1990 it rose to Rs.800 billion. Again in 2000 the amount of public debt was Rs.3750
billion as 100% of GDP. Because of such deteriorating situation it was decided to
reduce debt burden by some organized means. For this purpose a committee was
established; headed by Dr. Pervez Hassan formerly vice president of World Bank; known
as Debt Reduction and Management Committee (DRMC) in 1999. The focal agenda
of the debt exits strategy was to reduce non development expenditure and gear up the
privatization of public entities to pay back the foreign debts. The other important aspects
taken care of in the propose plan include improvement in the remittance through official
channel, measure to enhance exports and to stop inflow of unwanted imports. Other
tasks assigned to committee were:
1.
To ascertain why there was a heavy growth of loans
2.
What were the effects of public developmental and social expenditures due to
service charges and interest payments on public debt?
3.
What will be the effects of short term borrowing for the removal of deficit in BOP?
4.
Committee will make recommendations regarding reduction in debt burden and
management of debt burden.
Source in the Finance Ministry revealed that after approval of the cabinet the report of
DRMC will be presented to the experts and general public to invite their suggestions
and comments. The strategy may be amended/improved in the light of such comments/
suggestions before its final implementation.
This committee worked for a one full year and presented its proposals to Finance
Minister in 2000. The summary of the report was presented before cabinet. The salient
features of this report were:

The committee agreed to reduce the fuscal deficit by 3.5% till 2003-04 which was
residing at 6.5% in 1999-2000. For this purpose committee recommended to raise tax
revenue by Rs. 175 billion per year. This recommendation was based on this
perspective that if every year tax revenue was raised to this much amount, tax-GDP
ratio would rise to 14.7% which was 12% at that time.


Economic revival was felt as dire need of the hour, In order to attain economic
revival, committee forwarded that factor efficiency will have to be achieved which is
almost impossible in the absence of good governance.

Structural reforms were strengthened along with good governance. The sectors of
the economy where expansion is possible are: manufacturing, agriculture, exports and
oil and gass.

The negotiations will have to be speeded up to get assistance under Poverty

Reduction and Growth Facility (PRGF) because it is a cheaper loan.

It was proposed to evolve a policy package to get rid of further dependence on

foreign loans, future loans from the IMF in particular would be avoided. The disgusting
aspect of the loan financing from the IMF is obviously the harshness of conditionalities
and frequent visits of review missions to the loan recipient countries. These
conditionalities invariably come in conflict with the domestic economic strategies and
consequently optimum results are quite often difficult to realise.

The process of privatization be accelerated in the country and FDI friendly

environment be created so that country be make able to flourish foreign exchange
reserves. For that flight of capital be checked.

The short-term and medium-term strategy regarding debt management and debt
reduction be devised. An effective system of debt management and monitoring be
evolved.

To increase govt revenues is the utmost need of government. Following measures

were stressed to take action upon, in order to increase revenues efficiently: (1) tax-base
be widened. (2) Documentation of economy in order to avoid black practices. (3)
Implementation of sales tax system to its full. (4) tax- machinery be made effective. (5)
Costs of provisions of education and health which have to be borne by govt., should be
borne by public.

In order to cure BOP position, exports are needed to be enhanced. For this
committee recommended: (1) The free trade zones be discovered as this will result in
improving duty drawbacks. (2) Foreign Private Investment be increased in the fields of
manufacturing and technology. (3)Diversification of exports. (4) real devaluation of
rupee. (5) Reduction in the duties of intermediate goods.

The suggestions of the committee were, as due to higher payements of debt the
level of investments in country remains low due to which economic growth suffers
consequent upon decreasing capacity to pay loans and service charges. In such
situation the debt burden goes on mounting. Thus committee recommended to have $1
billion to make payment regarding service charges. It also suggested to have additional
$4 billion so that country should maintain a reasonable level of foreign exchange
reserves. According to committee debt repayment could be a real problem for coming
years, however committee entirely refuted the situation of being default. It proposed to
get emergency assistance from IMF and WB worth $6 billion. It also proposed
rescheduling of loans worth $4 billion so that financing Gap could come to an end.

Moreover DRMC suggested in case of crop failure and natural calamities ergo
unfavourable TOT, have reserves worth $5 billion so that import requirements could be
met.

Committee proposed to make quicker payments regarding short-term loans, for that
it stressed on privatization of OGDC, HBL, PTCL, WAPDA, KESC etc. the sales of such
institutions to foreigners will result in increasing supply of foreign exchange.
As a result of these steps, the increase in public debt could be cured.

Results
The DRMS could not become helpful rather the debt burden went on increasing. Till
January 2008 the total domestic debt was Rs.2944 billion which rose to Rs.3749 billion
in 2009. In June 2010, the amount of internal debt was Rs.4490 billion and external debt
was $60 bn. This ever increasing trend didnt stop anywhere and in 2012 internal debt
amounted to Rs.7207 billion alongwith external debt of $60.2 bn.
According to CIA Fact book, the situation of public debt I Pakistan is as under.
54.6% of GDP (2013 est.)
52.1% of GDP (2012 est.)
At the end of March 2013 the total amount of domestic debt was Rs.8796 billion with
external debt amounting to Rs.4831 billion. This shows that despite many efforts GOP
could not control the ever rising debt burden. The present Government has showed
interest in reducing and managing debt burden and thus has refreshed the ambition by
developing a Medium Term Debt Management Strategy (MTDS, 2014-18) that is
closely linked to its fiscal framework.

Medium Term Debt Management Strategy (MTDS)

(2014-18)
The MTDS is a plan that the government intends to implement over the medium term in
order to achieve desired composition of the government debt portfolio, which
captures the governments preference with regards to cost-risk tradeoff. It contains a
policy advice on an appropriate mix of financing from different sources with the spirit to
uphold the integrity of the Fiscal Responsibility & Debt Limitation (FRDL) Act, 2005. It
will provide a policy framework and enable the government to take informed decisions
based on the evaluation of cost-risk tradeoffs. It will also enhance the coordination with
fiscal and monetary management while helping to achieve greater clarity and
accountability for public debt management.
MTDS was devised under the advice of Ministry of Finance ( Muhammad Ishaq Dar) and
was headed by Secretary Finance (Waqar Masood Khan).
The MTDS final report reads:
Government of Pakistan has developed its first Medium Term Debt Management Strategy (MTDS) for
the year 2014-18. The prime objective of MTDS is to provide the financing for the government at
low cost over the medium to long term by giving due consideration to the risks.

The analysis of public debt reveals that the debt to GDP ratio stood at 62.7 percent in 2012-13,
consequently the debt servicing consumed around 41 percent of the total revenues. Over the past few
years, the composition of public debt has shifted towards domestic debt and furthermore into shorter
duration instruments which is a source of vulnerability and entails high rollover and refinancing risk. As
on June 30, 2013, around 34 percent of total public debt stock was denominated in foreign currencies
which exposes debt portfolio to exchange rate risk.
The MTDS provides alternative strategies to meet the financing requirements of the government. The four
different borrowing strategies have been assessed with associated costs and risks analysis under the
alternative interest and exchange rates scenarios. The cost and risk trade-off analysis is based on the
existing debt cash flows, market and macroeconomic projections and alternative borrowing strategies.
The robustness of alternative debt management strategies was
evaluated by applying stress/shock scenarios for interest rates and exchange rates. A strategy with
an increased reliance on domestic short term sources is the least attractive.
MTDS also provides strategic guidelines for comprehensive debt management which include:
(i)
Widening of investor base
(ii)
Development of domestic debt markets
(iii)
Lengthening of maturities of debt Instruments
(iv)
Stimulation of external finance.

Objectives & Scope of Medium Term Debt Management Strategy

1.
The prime objective of MTDS is to provide financing at the lowest possible cost
while giving due consideration to the risks. The MTDS has the following main
objectives:
Fulfill the financing needs of the government.
Minimize the cost of debt while maintaining the acceptable level of risks.
Facilitate the development of domestic debt market.
2.
Time horizon of the debt management strategy is medium term i.e. Till 2017/18.
Starting point for the analysis is the debt portfolio as of end-June, 2013.
3.
The scope of MTDS analysis in this report covers debt contracted by the federal
government which includes on-lending to the provinces. Federal government debt
consists of external debt from multilateral and bilateral sources as well as Eurobonds,
domestic wholesale instruments such as PIBs, T-Bills, GIS), domestic retail instruments
(National Savings Schemes), as well as borrowing from State Bank of Pakistan through
MRTBs. The analysis also includes the portion of IMF debt which was utilized towards
budgetary support. The remaining portion of IMF debt is not included as it was only
utilized towards balance of payment support and reflected in foreign currency reserves
of the country.
For further details on MTDS: http://finance.gov.pk/publications/MTDS_2014.pdf

Conclusion:

The results from this strategy will be obvious in the days to come. However, in recent
past (May, 2014) Dawn reported that the government confirmed to have added about
$15.3 billion to the countrys external debt, violating prudent borrowing limits under the
Fiscal Responsibility and Debt Limitation Act (FRDLA, 2005) and promised to reduce
public debt significantly by 2015-16. Ministry of finance stated to the press that
This is part of Medium-Term Debt Management Strategy (MTDS 2013-14 to 2017-18)
The public debt to GDP ratio is projected to be brought down to 55.2pc by 2015-16. It
said the debt ratio was expected to be around 52pc by end 2017-18 which would be
well below the threshold of 60pc as mentioned in the FRDLA.
The Dawn report reveals that: The MTDS said the countrys external debt was estimated
to touch $72 billion (Rs7.202 trillion) at the end of this fiscal year on June 30 against
$57bn (Rs5.7tr at current exchange rate) same period last year. The external debt stood
at 24.9pc of GDP on June 30, 2013 which had now gone up to 27.7pc of GDP by end of
this year.
The government said it had violated the requirements of the FRDLA. Government was
required to reduce revenue deficit to zero by June 30, 2008 and then maintain revenue
surplus but the revenue balance had been running in the negative since 2005.
Giving reasons for this violation, it quoted increasing exogenous and endogenous
challenges including campaign against extremism, fragile law and order, continued
energy shortages, narrow tax base, non-materialisation of sufficient external inflows and
unprecedented floods of 2010, rains in 2011 and increasing debt servicing requirement.
For further details: http://www.dawn.com/news/1105310
Note: all the statistics are taken by me from State Bank of Pakistan and Ministry of
Finance, Govt. of Pakistan, except those in Dawn report.