PUBLIC DEBT MANAGEMENT - uni-muenchen.de DEBT MANAGEMENT by Muhammad Nadeem Hanif * 1. Introduction ... is a need for early resolution of debt problem in Pakistan because it couldAuthors:

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PUBLIC DEBT MANAGEMENT

Muhammad N. Hanif

2002

Online at http://mpra.ub.uni-muenchen.de/10212/MPRA Paper No. 10212, posted 30. August 2008 07:48 UTC

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PUBLIC DEBT MANAGEMENT

byMuhammad Nadeem Hanif *

1. Introduction

Growing public debt is a worldwide phenomenon. It has become a commonfeature of the fiscal sectors of most of the economies. Contemporary economicwisdom does not consider public debt a major problem per se; rather problemis the mismanagement and unsustainability of the public debt. The moderntheory for public debt sustainability discerns a fundamental relationship betweeneconomic stability and debt sustainability in a country. The inadequate debtmanagement and a permanent and unlimited growth of debt to GDP ratio mayresult in some negative tendencies and changes in main macroeconomic indicators,like crowding out of investment, financial system instability, inflationarypressures, exchange rate fluctuations etc. There are also certain social andpolitical implications of unustainable debt burden. Persistent and high publicdebt calls for a large piece of budgetary resources for debt servicing. Forexample, in Pakistan debt servicing uses up more than fifty percent of the totalrevenues (Table 6). Consequently, the government is forced to cut allocationsfor other public services and it faces serious difficulties in executing its electroalmanifesto, if it has. Still more serious implications of high and unsustainablepublic debt are possibilities of windespread bankruptcies like in Mexico andLatin American countries during 1980s.

This paper examines the issue of managing public debt and analyses the presentsituation of pulbic debt in Pakistan. The next section discusses some theoreticalaspects of the public debt including the debt management while Section 3presents objectives and the functions of debt management and the location ofthe debt managment functions. Section 4 examines the situation of public debtin Pakistan. It details the structure of the public debt in Pakistan and analysesthe trends in debt servicing. It also looks into the manageability and sustainabilityof the debt in Pakistan using some indicators of debt burden. The last sectionconcludes the paper.

2. Theoretical Aspects of Public Debt

When the government resorts to borrowing instead of introducing additionaltax measures, to finance the budget deficit, it creates a liability on itself known

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This paper was written in December, 2001, Helpful comments from Rehana Siddiqui and Seminar participantsat the Pakistan Institute of Development Economics (PIDE), Islamabad are greatly acknowledged. Theauthor is Assistant Director in State Bank of Pakistan, Karachi. At present he is Ph. D. Candidate at PIDE.However, views expressed should not be attributed to the SBP or PIDE.

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as public debt. A government has various alternatives to borrow from for thepurpose of financing fiscal deficit. One way is to borrow directly from thecentral bank which is equivalent to printing of money. The other alternativesare; borrowing from domestic commercial banks, borrowing from domesticnon-bank sector and borrowing from external sources. Each method has its ownimplications for various aspects of the economy. Government usually adoptsa mix strategy and utilises a number of options at the same time.

Public debt accumulates over time if deficit in the budget persists for a longperiod of time. Here a number of questions arise: Does it make any differencewhether the government pays for its expenditures by raising taxes or by issuingdebts? What are the implications if debt is issued to central bank, domesticcommercial banks, domestic non-banks or external sector? Is debt really aburden and under what conditions it becomes unmanageable and unsutainable?Different groups of economists have different views on these issuses.

With regard to the first question an important group of perfessionals believesin “Barro-Ricardo proposition of equivalence.” The proposition is that thereis basically no difference between the two ways of financing the deficit i.e.raising taxes or issuing debt. The argument is that financing deficit by issuingbonds merely postpones taxation. In a future time period the government hasto raise taxes to service the debt and there is no difference (after properdiscounting) between present and future taxes. When government finances itsdeficit by debt, people realise that they have to pay higher taxes in future. Thus,the people in anticipation of future payment of taxes do not consume increasein incomes due to expansionary fiscal policy. The proposition, therefore, suggeststhat private savings will increase due to debt financing (Barro, 1989). If thepropostition holds then the budget deficit does not exert any pressure on interestrates and there is no fear of crowding out. However, empirical evidences donot support this proposition. The sharp decline in US Private saving rate during1980s is obvious evidence against it. With respect to developing countries Haqueand Montiel (1988) tested the equivalence hypothesis for a sample of sixteencountries and rejected it for fifteen countries including Pakistan.

Although Barro-Ricardo equivalence hypothesis is not proved for its consequenceson private savings yet it has some implications on social grounds.The governmentwho issues debt to finance its expenditure actually transfers tax burden to cominggenerations. Thus the debt finance policy gives all the benefit to current generationand postpones the burden of deficit to be borne by the comming one.

Public debt issued to different entities has different implications on macroeconomicvariables. If debt is issued directly to central bank it increases the high powermoney which in turn transforms into monetary expansion through money multiplier.

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Three benfits can be identified for the current generation; first their disposable income may rise due toexpansionary fiscal policy (low taxes and high public expenditure), second they may enjoy high level ofpublic services and third, since debt issued is the asset of the lenders, their net wealth may increase.Whereas coming generations may face tight fiscal policy, high taxes and inadequate public services.

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This mode of financing is considered highly inflationary and thus economistsgenerally discourage borrowing from the central bank. A significant part of publicdebt is owned by commercial banks. Although this type of debt is considered lessinflationary as compared to debt to central bank yet the perception is that it crowdsout private investment. However, in countries like Pakistan where banking systemis less competitive, sectoral alloction of credit is practised by monetary authoritiesand in which people have a lot of black money [Shabsigh (1995)], it is difficultto believe that investment will be crowded as a result of public borrowing fromcommercial banks. The crowding out hypothesis in the context of Pakistan isfurther denied if we compare credit plans of several years in Pakistan and end-yearactual performances of monetary sector. The factual position is that the privatesector always gets its full share from overall credit despite excessive borrowingby the government. Thus one can safely conclude, at least for Pakistan, that publicdebt issued to commercial banks creates no problem of crowding out privateinvestment. Hyder (2002) attempted to test the crowding out hypothesis for Pakistanusing vector error-correction farmework using data for 1964-2001. His study foundthe absence of crowding out phenomena in Pakistan.

Third source of government debt is domestic non-bank private sector. Governmentborrowing from non-bank private sector has no effect on money supply and henceno implications for interest rates and inflation from supply side. However, accordingto portifolio-balance model of demand for money, the debt held by people doesexert an upward pressure on interest rates. According to this model asset-holdersdistribute their demand for financial assets across the available menu of assets,optimising a risk-return trade-off. Money enters the portfolio-balance problem asa riskless asset. When debt holdings of people increase they demand more moneyto offset the potential risk attached to these debts . With unchanged money supply,interest rates tend to rise due to excess demand for money (Dornbusch, 1975).Thus issuing debt to people has a fear of crowding out due to pressures on interestrates. This is why the theory of public debt advocates a mix strategy of debt financewhich ensures a moderate increase in money supply through borrowing frombanking sector while avoiding excessive bank borrowing and generating fundsfrom non-bank sector.

Another important source is the foreign or external source. Borrowing from abroadhas become a major feature particularly of the developing countries [Gray andWoo, 2000]. Foreign borrowing allows a country to invest and consume beyondthe limits of current domestic production and, in effect, finance capital formationnot only by mobilizing domestic savings but also by tapping resources from capital

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surplus countries. Foreign borrowing can lead to more rapid growth. However,debt accumulation and growth has non-linear relationship. Up to cretain level theimpact is positive and beyond a theshold the relationship is negative. Foreignresource inflows increased the resource availability and as a result it contributedto economic growth in South Asia (Siddiqui and Malik, 2002). However, if acountry borrows abroad, it must manage debt prudently. Exessive foreign borrowingand its improper use generate severe debt service obligations and country accumulatesmore and more debt that constrains future economic policy and, so, growth, as isthe case with Pakistan (Kemal A.R. 2002).

Other important issues related to public debt are whether public debt really is aburden and why sometimes it becomes unmanageable and unsustainable. Publicdebt is generally considered a matter of serious concern. Often an argument isgiven that each individual of a certain country bears so much debt burden . Is thisperception correct and is the fear genuine? In a fairly crude sense the answer isnot! The reason is that liabilities created by the government have their counterpartin the form of financial assets (treasury bills, government bonds etc.) held bypeople. Thus taking government and people of a country combined as a nation,the overall liabilities of the nation are equal to its assets; so net burden on thenation is zero (keeping aside the debt held by foreigners). So public debt is not amatter of serious concern as long as the nationals of the same country hold itsmajor part. Real burden is external debt since in this case asset holders are foreignersand the country as a whole is net debtor.

Debt is not a matter of concern as long as it is manageable and sustainable. Debtmanagement is the process by which the government acquires and utilizes thedebt efficiently and effectively. Debt is manageable as long as the cost of acquiringdebt is reasonably low and the debt thus obtained is used efficiently in such a waythat it helps growth in nation resources least in the long run. Debt is usedefficiently if the ratios of debt service to total revenue and external debt serviceto exports fall or remain constant. The underlying assumption is that projects forwhich borrowed money is used will generate sufficient output and exports fordebt repayment. In past, Pakistan’s debt management strategy generally focusedon finding new and cheap sources of finance and ignores the proper use ofborrowed funds. Kemal (2002) discussed the major four reasons of the improperuse of borrowed money in Pakistan, viz the donor’s agenda, corruption, capitalflight, and the adverse impact of loans on domestic savings. This is why thedebt management has become a much serious problem in our country. Thereis a need for early resolution of debt problem in Pakistan because it couldotherwise slowdown the declining growth rate further, and adversely impactthe overall macroeconomic situation in the country (GOP, 2001).

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In Pakistan, per capita debt is Rs. 28,784 as on 30-06-2001 as compared to per capita GDP of Rs. 24,965only during FY 01.

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Sustainability of debt is a situation where debt-to-income ratio declines or, atleast, remains constant over years. There is a formal model in literature on publicdebt to determine the factors contributing in its unsustainability. The model isbased on macroeconomic theory and some imprtant research studies made byprofessors J. Tobin, L. Spaventa and R. Dornbusch (see Botousharov, 1993 fordetailed exposition of the model). There are two debt determinants which influencethe debt-to income ratio; (i) primary budget deficit , and (ii) the difference betweenthe real interest rate and real GDP growth. If there is a high primary deficit (as apercent of nominal GDP) then debt-to-income ratio tends to fall. Thus the stabilityin debt -to -income ratio or equivalently sustainability of public debt depends onthe relative strength of the above opposite forces. It is usually concluded that ifprimary defict is zero and the economy is growing reasonably then public debt isno longer unsustainable. The underlying assumption is that if the real output grows,the resource generating capacity of the economy would also grow with the sameproportion. Thus, if the real interest rates are low and the rate of resource generationis high then debt would no longer accumulate unsustainably. It was exactly thesituation in USA during 1950s and 60s when interest rates were practically zero,output grew steadily and primary budget deficit was zero (even there was primarybudget surplus during certain years) and debt grew less rapidly than nominalincome. By contrast, in 1980s, the opposite was the case. Real interest rates werevery high, growth was sluggish and non-interest budget was in deficit. As a resultdebt-to-income ratio was rising. In a period of slow growth and high real interestrates, deficit translates into a rapidly rising debt-income ratio (Dornbusch, 1999).

3. Objectives and Functions of Debt Management, and Location ofFunctions.

3.1 Objectives

A clearly defined debt management objective (or objectives) is an important elementof the debt management framework since: (1) it facilitates the design of the debtmanagement program in a manner consistent with the attainment of the debtmanagement goals while avoiding conflicting objectives; (2) it enables themeasurement of performance of the debt management funcion; and (3) it harmonizesdebt management policies with other policies, particularly monetary policy.

The basic objective is to cover the government borrowing needs. The otherobjective may be to raise the funds required by the government at the minimumlong-term cost, while at the same time keeping variability in the cost atreasonable level. However, in economies in transition cost minimization may lead

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Primary budget deficit is equal to overall budget deficit minus interest payments.

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to excessive borrowing from central bank (fuelling inflation) or from ‘captivemarkets’ at below market interest rates (retarding the development of secondarymarkets). In such a case the aim may be to support the monetary policy.Coordinating the debt activities with the monetary policies of central bank maystrengthen the monetary management. It may aim at improving the functioning ofthe financial markets, particularly the treasury bills and the bond market, throughinterest liberalizations and integration of various market segments. Developmentof the domestic capital market may be another goal of the public debt management.The purpose may be to finance the government’s long term requirements and tofinance the overall requirements by keeping a balance in short and long-termliabilities. Another objective may be to avoid market disruption and keep themarket smoothly function in order to provide the government with continuousfunding at the competitive cost. Debt manager may also target foreign investorsas well as to encourage domestic savers to make investable funds available forfinancing purposes. Another objective may be to diversify borrowing andbroadening the debt distribution. The purpose may be to diversify (with respectto currency and/or market) debt instruments in order to facilitate debt absorptionand tail instruments to market requirements. The private market may be used tobroaden the funding. Promoting balanced maturity structure may be an objectivein order to manage the size and frequency of the refunding. Lastly, maintainingthe creditworthiness may be an aim of the debt management.

Deciding about the list of objectives and establishing an appropriate hierarcy ofobjectives is an important task. The hierarchy of objectives depends, in an importantway, on the stage of market and institutional development and will evolve overtime with the financial and government securities markets and the achievement ofeconomic stabilization goals.

Countries with less developed government securities and financial markets or ahistory of high inflation attach primary importance to monetary policy and marketdevelopment considerations. Pakistan has support of monetary policy as primarydebt management objective, then comes minimizing the borrowing cost,encouragement of savings, diversification of borrowing and broadening the debtdistribution, and so on [Dattels, P. and Carracedo, M.F.(1997)].

3.2 Functions

Debt management is the process by which the government acquires and utilisesthe debt efficiently and effectively for budgetary purposes keeping its objectivesof debt management. It refers to the technical and institutional aspects of organizingthe public debt. The technical aspects focus on the need to determine the level offinancing requirements and to ensure that terms and conditions of those borrowingsare commensurate with the future debt service capacity of the country. The

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institutional aspects deal with the organizational, legislative, accounting andmonitoring of new borrowings as well as the total stock of debt. Following are thefundamental functions of debt management.

3.2.1 Accounting Function

For managing the debt one should know the debt. For example, information onexternal debt and debt service payments is essential for the day to day managementof foreign exchange transactions, as well as managing debt and for planning foreignborrowing strategies. At the most detailed level, such information enables centralauthorities to ensure that individual creditors are paid smoothly; at more aggregatedlevels, debt data are needed for assessing current foreign exchange needs, projectingfuture debt service obligations, evaluationg the consequences of further foreignborrowing, and the management of external risk. Accounting provides the firmbasis for best knowing, in details, the extent of debt and the payments of debtservice (interest and redemption).

Major requirement to discharge this function is microcomputer-based systems forrecording and reporting debt and for triggering debt service payments.

3.2.2 Forecasting Function

The government’s borrowing requirements are a function of the flows of its revenueand expenditure over time. Such flows should be forecasted on weekly and monthlybasis, so that cost-effective arrangements can be put in place for the financing ofcash deficits and for the investment of temporary surpluses, if any. Forecasts dependheavily on projections based on the accounting system but must often supplementthem with analytical work on specific issues, surveys among government agencies,and so forth. In the latter case, the quality of the information received is clearlyinfluenced by the ability of the authorities to engage in a constructive dialoguewith the suppliers of data and forecasts. Calculating debt service payments whena large share of the debt stock has been raised in the form of short-term borrowings,or at floating rates of interest, futher complicates forecasting. Thus, governmentdebt manager must have a satisfactory capacity to analyse and project trends inthe global and national economy and in the financial markets.

3.2.3 Policy and Planning Function

For each country, the objectives of domestic debt management must be translatedinto operating policies and borrowing programs. Gross borrowing requirementswill determine the size of the program, and the volume to be raised will influencethe policy framework. If the needs are large, the government debt manager must

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As in the case of Pakistan around 85% of our total exports is in US$; and if one looks at the exchangerate composition of our external debt, around 20% of it is in yen.

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try to tap all pockets of savings in the economy more or less at the same time; onthe other hand, if they are small, he or she can afford to take a longer view andto develop and use one or two market segments at a time. Which subsector willhave priority depends as much on tradition and national institutions as onmacroeconomic and financial conditions. Clearly the availability of funds and themarket conditions will be important for the choice of sector and the design ofborrowing instruments. Thus, familiarity with the investment habits and preferencesof each category of savers, and with the market for the kind of instruments thatmight attract them becomes a significant element in policy formulation.

3.2.4 Risks Management Function

One of the debt management functions is to cover the risks created by exchangerate and interest rate swings. Sometimes a country is exposed to the balance ofpayments shocks arising from unfavourable changes in the relative prices of exportsand imports. Suppose that the country’s exports earnings are in US dollars and itsforeign debts are repayable in Japanese yen . Deterioration in the exchange rateof the dollar vis-a-vis the yen will add to the debtservicing obligation of theborrowing country. A similar problem can be caused by variable interest rate loans.

3.2.5 Primary Issuance Function

Strictly speaking, this function should be limited to the decisions and activities ofthe government debt manager leading up to the time that a loan or bond issue isready for launching. In some countries, the task of actually selling the issue intothe market is undertaken not by the treasury (the issuer) but by the central bank(as in Pakistan), and the objectives may be as much those of monetary managementas of debt management for the government. However, in other countries, theresponsibility for palcing the issue in the market remains with the issuer thetreasury or separate debt office and the issuing function must then be seen as acontinuum, that is , it covers the whole relationship between the state borrowerand the primary market for government paper. Characteristics of the primaryissuance function vary from country to country partly because of admiistrativestructures and national traditions but more significantly because of differencesin government objectives and policies, with regard to the markets that the governmentwants to tap, the variety of instruments used, selling teachniques (such as auctions),and so forth.

A widespread practice among some countries is that of appoiniting primary dealersthat participate regularly in a significant way in auctions of newly issued governmentsecurities. The government thus creates a public or private sector network to

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prerform the issuing function. The use of primary dealers has been the establishedpractice for many years in countries such as the United Kingdom and the UnitedStates.

3.2.6 Secondary Market Function

The secondary market function is normally performed by players other thangovernment debt manager but can be of vital importance to the success of theiroperations, particularly if government borrowing needs are high and expected toremain so and if the securities markets are dominated by professional investors.For them the secondary market will guarantee the liquidty of their investments setprices on a day-to- day basis. Naturally, they will be more willing to take up newussues if they know that they can liquidate some of their holdings at any time forcash and at reasonable prices.

But a secondary market may not spring up by itself and experience of variouscountries shows that it typically requires both active intervention from the authoritiesand the reduction of various regulatory obstacles like:

A controlled or administered structure of interest rates through which theeffective yields on government bonds are kept below the levels of thecredit market;

Protection by the commercial banks of their privileged position as lendersto the private sector;

Legal restricions on the issuance of corporate debt by enterprises;

High minimum denominations of new issues, which bar individualinvestors from participating; and

The lack of securities infrastructure in the form of a competitive auctionsystem, rating agencies, and clearing and settlement systems.

The role of the authorities must therefore be twofold: on the institutional side, toreduce the legal and regulatory obstacles and create a supporting framework forthe secondary market and on the operational side, to adopt issuing policies andtechniques that will facilitate wholesale trading of government securities.

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3.2.7 Clearing and Settlement Function

In small and undeveloped secondary markets, clearing and settlement (i.e., thetransfer of ownership of securities and the transfer of sales proceeds) are normallyundertaken by the banks (each bank making such transfers between the accountsof its own customers, and banks also making transfers among themselves), or bythe central bank in case of transactions involving government securities held bydifferent banks. However, this structure is not likely to foster a high turnovermarket, and other solutions have therefore come to dominate more developedmarkets. While all of them feature a central despository centre, there is a ratherrich variety of models to consider. In some countries, the central bank has agreedto enlarge its role as agent for the government debt manager by operating acomputerized debt registry and payments scheme for the secondary market. Inother countries the government as market participant has joined hands with thebanks and the dealers to create a separate securities depository centre, which effectslegally binding transfers of ownership and which may or may not also makepayment transfers through a clearing process. To guard investors against counterpartyrisk (i.e. the failure of a party to a securities transaction to fulfil his obligations,)the centre may have the right and the resources to step in and meet the failingparty’s obligation. Through sophisticated legal and technical means, countriesstrive to achieve a fail-safe application of the principle of “delivery against payment,”this being a prerequistite for the success of transactions involving a chain of separatedeals.

3.2.8 The Information Function

The importance of timely and accurate information from government debt managerto the market is highly important. Equally important is that the debt managersreceive relevant information from the market in order to tailor their issuing activitiesto the goals set by policymakers. Increasingly, the debt manager is also a participantin electronic information systems that have been set up in most of the countriesby the electronic information services, by banks and dealers, or occasionally bythe authorities to facilitate the functioning of the primary and secondary markets.Thus, in a number of countries, traders are concerned to other traders, to issuers,and to investors through screen - based information and market - making systemsthat allow quick execution of sell and buy orders (and can be used to call for bidsat a primary auction). The advent of fibre-optic cables and other technical advancesare likely to allow a very rapid growth of such information systems, facilitatingthe role of debt managers but also making demands on their time.

3.2.9 Supervisory and Coordinating Function

For all its activities as a market pariticipant, the governement must always play a

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central role in market surveillance. Different models can be followed to implementthis function: some countries have separate agencies for the supervision of banksand of capital markets, reporting to parliament through the ministry of finance. Inother cases, the ministry has delegated certain tasks and powers to the central bank,to the stock exchange, or to self-regulatory organizations. Recent experience hastaught many countries the lesson that the supervisory function requires forethougtand vigilance, which can only be achieved with staff resources in sufficient numbersand of the right quality. There is a need also to coordinate the debt managementfunctions.

3.3 Location of the Functions

Public debt management comprises a number of separate but related functions.Where are these debt management functions located? Because the rationale forborrowing is to finance the budget, the legal authority and responsibility to borrowis normally given to the institution that formulates the budget and is accountableto the parliament. Generally, this is the ministry of finance establishing the linkbetween “budget making” and “budget financing”. Thus the principal debtmanagement authority, the ministry of finance, has the responsibility for managingthe public debt. However, the tasks and functions of debt management may bedelegated by the ministry of finance to other institutions or to specialized departmentsor agencies of the ministry. Three possible institutional arrangements for the generalconduct of debt management are:

The Ministry of Finance

The ministry of finance is responsible for the tactical and strategic policy functionsas well as many other debt management functions (e.g.,in Argentina, Japan, andthe United States). Certain divisions within the ministry usually undertake debtmanagement functions. Alternatively, a treasury directorate may be establishedwithin the ministry of finance, centralizing the management of financial resourcesand liabilities of the governement and consolidating fiscal and debt managementfunctions (Brazil, France, and Spain fall within this arrangement). Broadly speaking,in these arrangements, the central bank is responsible for only the more technicalaspects of debt management, such as selling, banking, or settlement arrangements.

The Central Bank

The central bank plays a role as an advisor in the formulation of debt managementpolicy and may also, within well-specified parameters, be in charge of strategicpolicy and shortterm management of the governement’s debt, as well as otherfunctions supporting debt management operation. This provdes some degree of

policy and operational discretion to the central bank in debt management (ascompared with the above arrangement) as is apporpriate when debt managementis integrated with monetary operations or when the central bank is responsible formarket development and functioning (e.g., debt program implementation is carriedout by the central bank in Italy and in the United Kingdom). In Pakistan State Bankis responsible for the management of government debt under sub-section 13(e) ofsection 17 of the SBP Act, 1956.

A Special Autonomous Agency under Governmental Supervision (theDebt Office.)

The establishment of a separate debt management office dealing with many debt management functions is a thrid type of institutional arrangement (e.g., in Ireland,New Zealand, and Sweden). This arrangment provides for greater institutionalseparation between fiscal, monetary, and debt management policies, though theygenerally operate within well- specified policies established by the ministry offinance. These offices are a fairly recent phonomenon, dating from the late 1980s,with the exception of Sweden, where the debt office was created in 1789 to borrowon behalf of the Kingdom of Sweden and manage the state debt. Parliament wasresponsible for the debt office until July1, 1989, at which time it was transferredto the government. It is now an independent government agency subordinate tothe ministry of finance. It is the sole institution that may borrow on behalf of the Kingdom of Sweden and is responsible for debt management.

Other debt management agents may be designated (or instituted) to support primaryand secondary markets or both. For example, primary dealer groups are sometimesformed with specific obligations to facilitate the development, organization, andliquidity of efficient wholesale markets for government securities(e.g., in France,Mexico, Pakistan, Spain, Sweden, the United Kingdom, and the United States).In the case of retail instruments that are sold to the general public, separate agenciesare sometimes used to sell and service these specialized instruments for example,the Central Directorate of National Savings Schemes in Pakistan; the UnitedKingdom uses the post offices as a distribution system for retail debt instruments.A securities commisson may regulate and supervise government securites markets.The clearing and settlement functions may be suppported by a central depositoryorganization, either publicly or privately owned. Finally, special consultation groupsare sometimes formed to assist in improving the design of debt managementprograms and to encourage the transparency of operations.

The scope of institutions and operating arrangements differ depending on countrycircumstances, the stage of market development, and efficiency considerations.Debt management functions under consideration can be passed through the criterialisted below, which serve as a guide for locating debt management functions. For

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each country, depending on the stage of market development and other circumstances,different institutional answers may present themselves for the appropriate executionand coordination of debt management functions.

What is the objective of the debt management function? Thisguides the locating of each of debt management function.

Can accountability be established for the performance of the debtmanagement function by the institution that is performing the function?This is an important tool for measuring the attainment of the objective.

Are there overall efficiencies - economies of scale, comparative advantage,of information externalities - to be gained by an institution performing thefunction?

Are public confidence and transparency enhanced by locating the debtmanagement function within a particular institution?

4. Public Debt in Pakistan

4.1 Structure of Public Debt

In Pakistan outstanding public debt has exceeded our GDP and thus incomeper capita is lower than per citizen indebtedness (See footnote 2). Thisaccumulated public debt is the result of structural weaknesses in the domesticeconomy and external account. Debt in Pakistan is raised through a number ofways. Around 42.7% of the present stock of total debt is domestic debt [Table-1(b)]. Excessive government expenditures, stagnant tax revenuse, high returnson government securities and inappropriate sequencing of financial reforms,led to bludgeoning domestic debt profile. In domestic market there are a numberof instruments available to the government through which it mobilises fundsfor financing budget deficit. Different instruments of debt have different termsand conditions in the form of availability, costs and maturity periods. About55.5% of the total debt is obtained from external sources. Remaining 1.8% isthe explicit libilities . Large current account deficits, stagnat export receipts,and declining workers remittances, effectively forced Pakistan into anunsustainable situation. It appears that external financing of domestic budget

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There are some definitional issues with respect to Public Debt in Pakistan. Consistent series as per newdefinitions by SBP is not available prior to 1998. However for the purpose of detailed comparison dataprior to 2000 is taken from SBP Annual Reports for the years 1999(i.e., FY-99) and earlier. Data forthe year 1998 and onward is taken from the latest SBP Annual Report (for the year 2001). One may feeloverlapping in the data presented but it also highlights the differences caused due to definitional changes(For further detail one may consult SBP Annual Report for the year 2001).As per SBP AR (2000 -2001) total debt comprises DD, ED and explicit liabilities (which includes SpecialUS $ Bonds, FEBCs, FCBCs, and DBCs,’ of which special US $ Bond is a foreign liability, while FEBCs,FCBCs, and DBCs are also foreign liabilities payable in Rupees.

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deficit is cheaper than the domestic financing. However, under certaincircumstances external financing is significantly more expensive than thedomestic financing [Gray and Woo, 2000].

The structure and composition of public debt in pakistan is given in Tables 1 and2 respectively. Number of changes has occurred in the structure of debt over years.In 1986, the share of external debt in the total outstanding debt was 48.2% andnow in 2001 the share of external debt and liabilities is 57% of the total. However,annual compund growth rate of total debt declined slightly from 16.8%[Table 1(a)]during 1986-99 to 15.1% during 1994-99 and to 14.4% during 1998-2001.

Presently domestic debt is 42.7% of the total debt. It is classified into threecategories: permanent debt, floating debt and unfunded debt. During the last 15years unfunded debt has shown highest growth as compared to other components(Table-2). The share of unfunded debt in total domestic debt increased from26.7% in 1986 to 40.4% in 2001. The share of permanent debt declined during theprevious fifteen years. It declined from about one third of the total domestic debtin 1986 to one sixth of it in 2001. Though the share of floating debt decreasedfrom 44% in 1986 to 36.7% in 1997, it again rose to almost same level at 43.2%in 2001. Floating debt is used to meet mismatches between federal governmentreceipts/payments and forms the basis of central bank’s monetary policy. Earlierthese loans were available to the government at rates considerably lower than themarket interest rates. But after the introduction of financial liberalisation whichincluded, among others, the rationalisation of interest rates and promulgation ofauction system, the cost of floating debt increased considerably.

There has been a shift from the long-term external debt to short or medium termdebt during 1990s and it increased share of high-cost loans in the external loanportfolio of the government. The expenditure on servicing of external debt increasedsharply from less than one billion dollar in 1980 to around two billion dollar in1990 . It surged to more than five billion dollar in 1997; and decreased to U.S$3334 million in 2001 [Tables 4), but this decrease is largely due to the reschedulingof debt.

Overall debt servicing increased with a compound growth rate of 20.2% during1986-99. Interest payments on domestic and foreign debt grew by 21.6% and14.8% respectively [Table 5 (a) ]. However, there has been a slower growth in debtservicing during 1998-2001 just beacuse of rescheduling of debt [Table 5 (b)].

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The term’unfunded debt’ seems superfluous, but used traditionally.

There is a significant impact on outstanding amount of floating debt, and hence in the overall domestic debt,, dueto recent restructuring agreement with Paris Club(for details see SBP Second Quarterly Report for the year 2001-2002).

Ea rlier short and medium - term loans were used to combine. Now , as per new format (introduced in the SBPAR (2000-2001), long and medium-term loans are combined together to depict actual picture of short-termloans separately. Since we are talking of overall external debt servicing, this issue does not affect our analysis.

In 1980 total debt servicing paid was $869 million which in 1990 rose to S1,902 million (See World Bank,2001a).

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Debt servicing claimed a share of 50% in total budgetary resources in 2001 whileits share in mid eighties was around 21 per cent [Table6(a) & 6(b)]. It indicates thathigh expenditure on debt servicing is pre-empting scarce public resources andsuffocating public sector development efforts.

4.2 Indicators of Debt Burden

From the above analysis it is clear that Pakistan is experiencing a high growth inoverall public debt with its composition changing towards high cost debt. Due toaccumulation of high cost debt, ist servicing has increased sharply with a mountingpressure on budgetary resources. The debt has become a burden on the economy.There are various measures of debt burden used in literature. Some of them arereported in Table 6(a) & 6(b) in the context of Pakistan. Analysts attach differentdegrees of importance to each of these indicators, none of which alone providesan accurate prediction of a country’s capacity to meet its debt service obligations.

The ratio of total debt outstanding to GDP is the basic indicator of the level ofindebtedness of a country. It illustrates the burden of debt placed on theproductive capacity of the economy. In Pakistan this ratio was slightly below 100%in 1998 and it surpassed this level in 1999 [Table 6(b)]. A cross-country comparison(Table 8) shows that it is a high ratio compared with other developing countries.Our debt to GDP ratio (at 106.7% in 1999) is more than double of the same for asample of 15 developing countries (at 43.4% in 1999). Ratios of external debt toGDP and export are other indicators widely used by international investors whilemaking judgements about a country’s creditworthiness. In Pakistan, external debtto GDP ratio increased from 38.4% in 1990 to 64% in 2001 [Table 6(a) & 6(b)].External debt to export ratio also increased during the same period, though itshowed some decline during the last few years. If we make a cross- countrycomparison, both these indicator are higher than the respective averages of the low-income countries. [Table 9(a)]. Comparison of these ratios and some other ratiosis also made among countries in the sample grouped on the basis of indebtedness[Table 9(b)]. Other indicator used for similar purpose is the ratio of internationalreserves to external debt. International reseves act as a cushion against fluctuationsin foreign exechange earnings. A country with high ratio of international reservesto external debt would be in a better position to service its debt. The rule of thumbfor this ratio is a reserve to debt ratio above 18% is satisfactory. In Pakistan thisratio is not satifactory though it improved significantly to 6.1 % in 2001 from 4.5%previous year [Table 6(b)].12

11

11 The classification is based on World Bank estimates of per capita GNI during 1999. Countries forwhich estimates of per capita GNI are US$ 755 or less are classified as Low Income Countries, thosefor which estimates of per capita GNI are in the range US$ 756-2,995 are classified as Lower MiddleIncome countries those for which estimates of per capita GNI are in the range US$ 2996-9,265 areclassified as Upper Middle Income Countries,and those for which estimates of per capita GNI areUS$9,265 or more are classified as High Income Countries (World Bank, 2001b).The reserve to debt ratio has jumped to 9.3 after unprecedented increase in the foreign exchangereserves due significant behavioural shifts in the foreign exchange market that came in the aftermathof 9/11 events. But even then it is half of the ratio considered satisfactory.

12

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Using a rule of thumb World Bank classifies countries as serverely, moderately andless indebted countries. According to the World Bank classification, Pakistan didnot fall in the category of severely indebted countries on the basis of 1998 data,though it was on the sharp edge. It falls in this category in 1999. Fifteen comparablecountries in the sample are grouped on the basis of their indebtedness in the Table10(a) &10(b). Most interesting feature of these tables is that in 1998 both Pakistanand India were moderately indebted countries but in 1999 Pakistan became severelyindebted country whereas india improved to be classified as less indebted country.Asalso noted by Siddiqui and Siddiqui (2002), Pakistan is the only country in SouthAsia classified as severely indebted country by the World Bank (2001). Our ratio ofnet present value of EDS to XGS increased from 220% in 1998 to 226% in 1999.According to latest IMF country report, on Pakistan, it further increased to 250% in2001.

We have discussed above that if real interest rate is below the GDP growth rate, witha zero primary dificit, further debt financing does not contribute to make the publicdebt unsustainable i.e., the government can continue debt financing without a resultingrise in debt to GDP ratio. In Pakistan, primary budget deficit remained generallygreater than zero, however, the primary surplus is observed during the last three yearsin a row. The real GDP growth remained higher than real interest rate during the lastdecade except in 2000[Table 7]. The period-average growth inreal GDP is 3.7 whileperiod-average real interest rate is - 2.0 for 1994-2001. The difference between thetwo is favourable except for the year 2000 when the economy grew slowly than thereal interest rate. However, in spite of lower GDP growth rate in 1999 & 2001 thedifference between the real interest rate and GDP growth rate is positive. It is Justbecause of rescheduling, and hence it is not a true indicator of whether debt financingis contributing toward debt usustainability or not . In such a situation, only the trendin debt-to-income ratio tells the true story regarding the sustainability of public debt,which in case of Pakistan is rising.

Pakistan has needed fairly regular access to the IMF during the last two decades.In the last few years, the maintenance of a program with the IMF has been a conditionfor obtaining debt relief from the Paris Club. Recently we have obtained $1.3 billionPRGF from IMF for the next three years, which has helped in getting further debtrelief from the Paris Club (recent restructuring). The country needs to clearly define

56

13

World Bank’s Global Development Finance (GDF) classifies indebted countries on the basis of tworatios: the ratio of the present value of total (external) debt service to GNP[PV(EDS)/GNP] and the ratioof the present value of total (external) debt service to exports of goods & services (PV(EDS)/XGS]. Theseratios cast a country’s indebtedness in terms of two important aspects of its potential capacity to servicethe debt: XGS (because they provide foreign exchange to service debt) and GNP( because it is the broadestmeasure of income generation in an economy). A country is classified as severely indebted if [PV(EDS)/XGS]>220% or [PV (EDS)/GNP]>80%,and is classified as moderately indebted if132%<[PV(EDS)/XGS]<220% or 48%<[PV(EDS)/GNP]<80%, and is classified as less indebted if[PV(EDS)/XGS]<132 % or [PV (EDS)/GNP]< 48%.

13

57

and set the goal of an exit strategy from the IMF. However, our debt managersbelieve that this programme and the subsequent restructuring will eliminate ourfuture needs of recourse to IMF assistance. Yes, it can. As using the overall historyof debt rescheduling of Pakistan Siddiqui and Siddiqui (2002) have found thatafter each rescheduling of debt. investment rate increased indicating that currentexercise may help us to promote investment and hence growth. But to ensure thisimprovement in our debt management process is a must. It was our inability toservice our external debt that led to two consecutive reschedulings by Paris Clubmembers and one from the quasi London Club during 1998-99 to 2000-2001. TheEuro Bond of the maturity over 1999 to February 2000 Period was rescheduledthrough a voluntary exchange with a single bond of extended maturity. The hugerollovers are in addition to the rescheduling exercises. The recent restructuring isfor a longer period and on softer terms [for details of rescheduling/ restructuringsee Table 11, and for terms of Paris Club rescheduling see Box 1 of the Annexure].It clearly shows that we have been unable to build our repaying capacity. Asindicated by the trend in debt to GDP ratio our public debt is no loger sustainableand if one look on accrual basis will decide that we are in debt trap. However, asmentioned above, with current restructuring there is a hope for arrest in the ratioof debt to GDP if we improve our debt management process.

5. Conclusion

This paper examined the issue of managing public debt and analyses the presentsituation of public debt in Pakistan. When the government resorts to borrowinginstead of introducing additional tax measures, to finance the budget deficit, itcreates liability on itself known as public debt. Public debt accumulates over timeif deficit in the budget presists for a long period of time. Growing public debt isa global phenomenon. Contemporary economic wisdom does not consider publicdebt a major problem per se; rather problem is the mismanagement andunsustainability of the debt.

Debt is not a matter of concern if it is manageable and sustainable. Debt ismanageable as long as the cost of acquiring debt is reasonably low and the debtthus obtained is used efficiently. Debt is used efficiently if the ratios of debtservice to total revenue and external debt service to exports fall or remain constant.Sustainability of debt is a situation where debt-to- income ratio fall or remainsconstant over years. It is the persisstent mismanagement of the debt which resultsin debt unsustainability. To avoid unsustainability of debt there is need for adoptingprudent debt management process. A clearly defined debt management objective(or objectives) is an important element of the debt management framework. Thebasic objective is to cover the government borrowing needs. Other(s) may be tominimize borrowing cost, minimize cost volatility, support of monetary policy,

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develop domestic capital market, avoid market disruption, attract foreign investors,encourage savings of the public, diversify borrowing and broaden debt distribution,promote balanced maturity structure, and maintain creditworthiness. The list andthe hierarchy of objectives depends on country’s situation. To achieve its setobjectives, the debt manager should perform some fundamental functions like:accounting, forecasting, policy and planning, risks management, primary issuance,secondary market, clearing and settlement, information, and supervising andcoordination function.

In Pakistan, due to improper use of debt, the debt management has become amuch serious problem. Presitent mismanagement of debt made it unsustainable,which is threatening to cause further slowdown in the declining growth rate of thecountry. Off course, current exercises of debt restructuring could not help improveour debt to GDP ratio immediately: however, it has improved some short run debtburden indicators significantly. It is hoped that these reschedulings/restructuringwill help us in increasing the investment and to promote growth. By improvingour debt managemet process we can ensure it.

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References:Arby, M.F. (1997), “Major Issues and Remedies with regard to Public Debt inPakistan” Journal of the Institute of Bankers, Pakistan, (June Issue).

Barro, Robert (1974), Are government bonds net wealth?, Journal of PoliticalEconomy, Dec. 1974.

Barro, Robert (1989), The Ricardian Approach to budget deficits, EconomicPerspectives, Spring, 1989

Botousharov, P. (1993), Sustainability of Bulgaria’s Domestic Debt, Bank Reviewof Bulgarian National Bank, No. 3/1993

Chiliah, Raja (1991), The growth of Indian public debt; Dimensions of the problemand corrective measures, IMF Working Paper WP/91/72 July 1991

Dattels, P. and Carracedo, M.F. (1997), “Survey of Public Debt ManagementFramework in Selected Countries” an IMF Study.

Dornbusch, R ( 1975), A portfolio- balance model in the open economy, Journalof Monetary Economics, January 1975

Dornbusch, R (1999), Macroeonomics, 7th Edition, Mc Graw-Hill InternationalEdition, Economics Series, 1999

GOP (2001), Summary of the Report of “Debt Reduction & ManagementCommittee”.

Gray, Simon and Woo, David (2000), “Reconsidering External Financing ofDomestic Budget Deficits: Debunking Some Received Wisdom”, IMF- PDP/00/8,International Monetary Fund, Washington D.C.

Haque, N & Montiel, P. (1988), Fiscal Policy and private saving behaviour indeveloping countries, IMF Staff Paper, 5, June 1988

Haque, N & Montiel, P. (1993), Fiscal Adjustments in Pakistan: Some simulationresults, IMF Staff Papers, Vol. 40,, June, PP 471-80

Hyder, Kalim (2002), “Crowding Out Hypothesis in Vector Error- correctionFarmework: A Case Study of Pakistan.” Paper presented in the 17th AnnualGeneral Meeting of the Pakistan Society of Development Economists (PSDE),held in Islamabad in January 2002.

60

IMF (1997), “Coordinating Public Debt and Monetary Management” Editedby V. Sundararajan, Peter Dattles, and Hans J. Blommestien

IMF (2000), Country Report ( for Pakistan) No. 01/178, October 2001IMF, Government Finance Statistics, various issues

IMF, International Financial Statistics, various Issues

Jungsoo, L. (1983), The external debt servicing capacity of Asian developingcountries, Asian Development Review, Vol. 1,No.2,1983

Kalderen, Lars (1997), “Debt Management Functions and their Location” inCoordinating Public Debt and Monetary Management, an IMF publication

Kemal, A. R. (2002), “ Debt Accumulation and Its Implications for Growth andPoverty,” Paper presented in th 17th Annual General Meeting of PSDE, heldin Islamabad in January 2002.

Siddiqui, Rehana and Malik A. (2002), “Debt and Economic Growth in SouthAsia”. paper presented in the 17th Annual General Meeting of PSDE, held inIslamabad in January 2002.

Siddiqui, Rizwana and Siddiqui, Rehana (2002), “Determinants of DebtRescheduling in Pakistan”, paper presented in the 17th Annual General Meetingof PSDE, held in Islamabad in January 2002.

Shabsigh, Ghiath (1995), “ The Underground Economy: Estimation, andEconomic Implications- The Case of Pakistan” IMF Working Paper No. 95/101.

Spaventa, L. (1987) The growth of public debt: sustainability, fiscal rules andmonetary rules, IMF Staff Papers, June 1987

State Bank of Pakistan (various issues) Annual Report, Karachi.

State Bank of Pakistan (2002), 2nd Quarterly Report for 2001-2002, Karachi.

World Bank (1990), “Debt Management Systems”. World Bank DiscussionPapers No. 108, Washington D.C.

World Bank(1994), “External Debt Management: An introduction” World BankTechnical Paper No. 245. Washington D.C.

World Bank (2001a), Global Development Finance for the year 2000 and 2001.Washington D.C.

World Bank (2001b), World Development Indicators for the year 2001.Washington D.C.

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Accronyms

ACGR Annual Compound Growth RateCBD Central Bank DepositsDBC Dollar Bearer CertificateDD Domestic DebtDDS Domestic Debt ServicingED External DebtEDS External Debt ServicingFCBC Foreign Currency Bearer CertificateFD Foreign DebtFEBC Foreign Exchange Bearer CertificateFEE Foreign Exchange EarningGDF Global Development FinanceGDP Gross Domestic ProductGFS Government Finance StatisticsGOP Government of PakistanHIC High Income CountryIMF International Monetary FundINT InterestLIC Low Income CountryLT Long TermMIC Middle Income CountryNBP National Bank of PakistanNSS National Savings SchemesPRP PrincipalPV Present ValueR ReservesRES ReservesSBP State Bank of PakistanST Short TermTAR Tax RevenueTD Total DebtTDS Total Debt ServicingTE Total ExpenditureTR Total RevenueX ExportsXGS Export of Goods and Services

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Annexure

Table 1(a): Structure of Public Debt in Pakistan (on the Basis of Old Definition)(Billion Rupees)

200.8378.3702.0805.4916.1

1,049.61,159.51,362.4

DomesticDebt (DD)

Growth Rate(%)DD ED TD

Share (%)DD ED

14.713.714.610.517.515.914.2

5.020.515.820.818.017.815.9

9.717.115.215.817.816.815.1

51.853.548.450.649.148.946.746.5

48.246.551.649.450.951.153.353.5

19861990199419951996199719981999

Year

186.8328.9749.4787.1948.1

1,097.71,326.01,565.0

ExternalDebt (ED)

387.6707.2

1,451.41,592.51,864.22,147.32,485.52,927.4

TotalDebt (TD)

Annual Compound Growth Rate (1986-99)Annual Compund Growth Rate (1994-99)Source: SBP Annual Reports 1997-98 & 1998-99

Table 1(b): Structure of Public Debt in Pakistan (on the Basis of New Definition)

(Billion Rupees)

1998199920002001

Year

1,176.21,375.91,559.91,708.5

1,483.11,695.91,788.42,223.8

ExplicitLiabilitiesDD ED

12.663.667.871.0

TotalDebt

2,671.93,135.43,416.14,003.3

Share (%)TD

Growth Rate(%)DD ED Ex.Liab. DD ED Ex.Liab.

17.013.49.5

13.3

14.35.5

24.314.5

404.86.64.7

77.9

17.39.0

17.214.4

44.043.945.742.7

55.554.152.455.5

0.52.02.01.8

Annual Compound Growth Rate (1998-2001)Source: SBP Annual Reports 2000-2001

Share in 1986 Share in 2001

DD ED DD ED Ex.Liab.

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Annual Compound Growth Rate (1986-99)Annual Compound Growth Rate (1994-99)Source: SBP Annual Reports 1995-96 & 1998-99

Table 2(a): Composition of Domestic Debt in Pakistan(Old Definition)

(Million Rupees)

19861990199419951996199719981999

58,200102,800267,633293,568294,705296,283289,707319,440

87,300145,000257,637294,233361,298433,833473,850561,590

52,900130,600176,710210,819252,892319,483395,988481,414

198,400378,400701,980798,620908,895

1,049,5991,159,5451,362,444

Table 2(a): Composition of Domestic Debt in Pakistan (New Definition)

(Million Rupees)

1998199920002001

277,140256,928259,597281,077

473850561,590647,428737,776

425,244557,389652,922689,679

1,176,2341,375,9071,559,9471,708,532

-7.31.08.30.5

Permanent Floating Unfunded Permanent Floating Unfunded

Growth Rate(%)

18.515.314.015.9

31.117.15.6

17.5

17.013.49.5

13.3

23.618.716.616.5

40.340.841.543.2

36.240.541.940.4

Annual Compound Growth Rate (1998-2001)Source: SBP Annual Report 2000-2001

1998 1999 2000 2001

Composition of Domestic Debt

14.222.820.19.2

18.515.416.9

19.320.026.323.921.618.522.5

13.813.815.510.517.516.014.2

29.327.238.136.832.428.225.023.4

44.038.336.736.839.841.340.941.2

26.734.525.226.427.830.434.235.3

9.70.40.5

-2.210.314.03.6

Growth Rates(%)PermanentDebt

FloatingDebt

UnfundedDebt

TotalDebt

PermanentDebt

FloatingDebt

UnfundedDebt

TotalDebtYear

YearShare %

100%90%80%70%60%50%40%30%20%10%0%

Share %

UnfundedFloatingPermanent

Total

Permanent Floating Unfunded Permanent Floating UnfundedTotal

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Table 3(a): Pakistan’s External Debt (Dld Definition)(Million US$)

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Table 3(b): Pakistan’s External Debt & Liabilities (New Definition)

(Million US$)

197019801990199419951996199719981999

Year

3,2578,520

16,64323,88725,38125,61326,30728,79930,736

45674836

1,5571,6131,3961,2811,3601,704

104737

3,1851,9383,2352,8162,4812,1601,830

3,4069,931

20,66427,38230,22929,82530,06932,31934,270

LongTerm

Use of IMFCredit

ShortTerm

TotalDebt LT

6.30.92.79.56.78.05.2

3.6-13.5-8.26.2

25.313.41.8

66.9-13.0-11.9-12.9-15.310.4-1.1

95.685.880.587.284.085.987.589.189.7

10.4-1.30.87.56.08.34.6

1.36.84.05.75.34.74.34.25.0

3.17.4

15.47.1

10.79.48.36.75.3

Growth Rates (%)IMF ST Total LT IMF ST

Share (%)

Annual Compound Growth Rate (1970-99)Annual Compound Growth Rate (1994-99)Source: Global Development Finance 2001 (World Bank)

Annual Compound Growth Rate (1998-2001)Source: SBP Annual Report 2000-2001

1998199920002001

29,66329,92131,47031,782

1,4151,8251,5501,529

450700700700

552418561675

32,08032,86434,28134,686

0.95.21.02.3

29.0-15.1-1.42.6

55.60.00.0

15.9

-24.334.220.36.9

2.44.31.22.6

92.591.091.891.6

4.45.64.54.4

1.42.12.02.0

1.71.31.61.9

Year Medium& LT

Use of IMFCredit

CBD ShortTerm

TotalDebt

Growth Rates (%)

TotalM/LT IMF CBD ST M/LT IMF CBD ST

Share (%)

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Table 4: Pakistan’s External Debt Servicing (Actual Paid) [new definition](Million US$)

Source: SBP Annual Report 2000-2001

Table 5(a): Trend in Debt Servicing (old definition)(Billion Rupees)

ACGR*(1986-99)

ACGR(1998-01)Source: SBP Annual Report 2000-2001

1995199619971998199920002001

Year

1,3341,3711,5321,711

987942

1,029

760799754763444508596

2,0942,1702,2862,4741,4311,4501,625

PRP INT Total PRP INT Total

1,9701,8912,5061,864

9181,0701,368

260286288332308467341

2,2302,1772,7942,1961,2261,5371,709

Principal

3,3043,2624,0383,5751,9052,0122,397

TotalInterest

1,0201,0851,0421,095

752975937

Total

4,3244,3475,0804,6702,6572,9873,334

13.435.374.976.1

106.8132.6162.9170.821.6

Domestic

6.411.416.021.225.728.528.738.714.8

Foreign

19.846.790.997.3

132.5161.1191.6209.519.9

10.819.443.557.169.397.586.7

126.320.8

TotalPRP

Foreign

Long-term (LT) Short/Medium-Term

19861990199419951996199719981999

Interest Payment (INT)Year

Table 5(b): Trend in Debt Servicing (ds) (New Definition)(Billion Rupees)

28.738.044.950.520.7

160.1178.9206.3178.8

3.8

1998199920002001

YearDomestic Foreign

Interest payments (INT)Exp.Liab

2.83.25.67.8

40.7

Total191.6220.1256.8237.1

7.4

PRPForeign

86.7123.097.187.90.5

278.3343.1353.9325.0

5.3

Total DS(TDS)

30.666.1

134.4154.4201.8258.6278.3335.820.2

Total DS(TDS)

*: Annual Compound Growth RatesSource: SBP Annual Report 1997-98 & 1998-99

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Table 6(a): Indicators of Debt Burden (Old Definition)(Percent)

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82.638.4

307.35.1

58.040.429.231.021.518.45.5

29.620.4

92.347.6

371.610.464.549.636.835.927.520.55.8

54.033.4

84.641.8

323.611.659.648.636.129.523.617.85.2

55.734.9

86.143.8

339.89.1

66.054.839.034.928.120.66.1

52.333.9

88.445.2

347.74.8

79.767.347.340.934.524.56.6

62.839.3

92.849.5

364.03.9

77.063.847.245.137.925.77.2

55.434.9

99.653.3

444.36.0

83.065.554.742.236.426.47.1

34.923.0

1990 1994 1995 1996 1997 1998 199975.336.3

393.48.5

51.433.521.022.514.911.23.8

35.715.7

1986IndicatorsTD to GDP Ratio (TD/GDP)ED to GDP Ratio (ED/GDP)ED to Exports Ratio (ED/X)Reserve (R) to ED Ratio (R/ED)TDS to Tax Rev. Ratio (TDS/TAR)TDS to Total Rev. Ratio TDS/TR)TDS to Total Exp. Ratio (TDS/TE)DDS to Tax Rev.Ratio ( DDS/TAR)DDS to Total Rev. Ratio (DDS/TR)DDS to Total Exp. Ratio (DDS/TE)INT to GDP Ratio (INT/GDP)EDS to X Ratio (EDS/X)EDS to Fr.Ex.Er.Ratio (EDS/FEE)Source: SBP Annual Report 1993-94,1997-98 & 1998-99

Table 6(b): Indicators of Debt Burden (New Definition)(Percent)

115.364.0

426.36.1

68.957.049.537.931.323.66.8

37.423.3

2001107.356.2

421.84.5

87.265.947.650.838.427.78.1

36.523.4

2000106.757.7

481.55.6

87.873.253.044.238.227.67.5

35.323.6

199999.855.4

407.13.5

78.464.843.944.337.325.37.2

55.434.9

1998IndicatorsTD to GDP Ratio (TD/GDP)ED to GDP Ratio (ED/GDP)ED to Exports Ratio (ED/X)Reserve (R) to ED Ratio (R/ED)TDS to Tax Rev. Ratio (TDS/TAR)TDS to Total Rev. Ratio (TDS/TR)TDS to Total Exp. Ratio (TDS/TE)DDS to Tax Rev.Ratio (DDS/TAR)DDS to Total Rev. Ratio (DDS/TR)DDS to Total Exp. Ratio (DDS/TE)INT to GDP Ratio (INT/GDP)EDS to X Ratio (EDS/X)EDS to Fr.Ex.Er.Ratio (EDS/FEE)Source:SBP Annual Report 2000-2001

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Table 7: Determinants of Debt Sustainability

*: From 1998 and onwards as per definition of SBP Annual Report 2000-2001 (new definition)Sources:SBP Annual Reports (Various Issues)GOP Economic Survey( Various Issues)Government Finance Statistics (IMF),2000

Average (MIC)Ave (All Above Countries)

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Table 8: Cross country Comparisons of (Overall ) Debt to GDP Ratios(Percent) Countries

LowIncomeCountries(LIC)

Average (LIC)

BangladeshIndiaIndonesiaNepalNigeriaPakistan

Middle-IncomeCountries(MIC)

EgyptKoreaMalaysiaMexicoPhilippinesSri LankaThailandTurkeyUruguay

Source: International Financial Statistics (IMF)-Year Book 2001

(Primary Deficit)

Ave.1994 - 01

Year INTonDD

INTonED

INTonTD

GDPDeflator

RealInterest

Rate

RealGDP

Growth

PrimaryDeficit/GDP

1.80.2

-6.8-8.1-0.9-5.8-0.51.04.40.5

-2.0

6.64.64.55.34.61.34.33.13.92.63.7

2.1-2.20.10.40.2

-0.20.5

-1.4-1.6-1.5-0.4

1986199019941995199619971998199920002001

6.79.3

10.79.4

11.712.613.613.013.210.511.8

3.43.52.12.72.72.62.12.32.72.52.5

5.16.66.36.17.17.57.27.07.55.96.8

3.36.4

13.114.2

8.013.3

7.76.03.15.48.9

4.84.4

11.313.4

5.57.14.82.1

-0.52.15.7

1 2 3 4 5 7 8=7-6 96=4-5

Difference

33.30.56.4

15.824.216.1

7.918.1

3.730.215.0

41.218.6

19.554.433.4

48.71.7

14.910.444.023.9

5.940.737.7

114.634.846.7

47.70.6

14.6

21.0

2.944.251.2

32.8

50.644.865.9

53.8

DD

4.034.9

7.644.216.614.3

4.318.017.2

10.19.1

9.334.2

4.68.04.6

11.412.7

14.144.0

16.978.421.122.4

8.929.430.9

5.160.522.427.341.612.714.6

7.423.923.9

2.920.924.024.055.0

4.315.724.221.431.1

7.981.446.451.396.617.030.331.645.355.1

31.311.00.0

49.113.927.6

22.221.8

6.114.6

0.045.9

7.622.3

16.121.6

37.425.6

0.095.121.550.0

38.343.4

1980

ED TD DD ED TD DD ED TD1990

54.642.452.6

124.978.870.7

1999

68

NIPA Karachi

Vol-7 No. 4

1980

24.011.328.010.414.638.813.889.248.527.526.453.746.125.927.417.020.018.2

23.69.4

2.94.1

18.3

13.420.2

6.344.426.612.018.928.018.813.512.8

6.64.3

1.93.37.9

8.613.0

4.024.618.2

5.79.5

14.910.6

7.26.8

0.40.41.90.31.51.50.73.74.72.52.84.62.12.51.21.71.81.5

7.858.032.5

133.0119.315.8

13.010.587.1

2.822.815.436.517.2

144.738.336.4

Low-IncomeCountries(LIC)

BangladeshIndiaIndonesiaNepalNigeriaPakistanLICEgyptKoreaMalaysiaMexicoPhilippineSri LankaThailandTurkeyUruguayMIC

360.4136.7

76.032.1

208.7

207.7133.7

44.6232.4212.4123.4

96.8333.1104.2

81.284.4

ED/XGS ED/GNP EDS/XGS INT/XGS INT/GNP RES/ED


All Developing Countries

Countries


467.5334.0233.9312.9226.4250.0297.8241.0

45.644.4

191.4230.1210.4

90.0196.1182.7135.5160.7

41.926.864.044.4

130.749.431.878.313.936.441.169.474.333.432.549.330.430.9

28.432.733.313.422.623.022.922.310.912.620.727.013.716.929.440.817.218.1

7.819.213.3

5.514.610.111.09.63.43.4

13.413.3

6.16.5

13.517.7

7.27.8

0.71.53.60.88.42.01.23.11.02.82.94.02.22.42.24.81.61.5

5.26.7

12.421.612.4

5.16.3

11.042.769.5

9.86.77.6

50.615.432.719.115.4

1990ED/XGS ED/GNP EDS/XGS INT/XGS INT/GNP RES/ED





1999

216.8139.9255.2219.4190.7342.9226.4154.1

74.246.9

105.1110.2139.5129.3193.5175.9127.2141.0

37.121.3

113.357.693.458.356.933.732.362.535.564.860.379.954.336.337.440.5

9.815.030.3

7.96.0

28.318.7

9.024.6

4.825.114.3

7.922.026.225.021.921.4

2.65.6

10.42.42.19.66.44.53.92.37.85.12.69.1

11.111.56.86.7

0.40.94.60.61.11.61.61.01.73.02.73.01.15.63.12.42.01.9

9.234.617.628.4

4.416.047.657.066.019.025.417.335.422.928.032.328.7

ED/XGS ED/GNP EDS/XGS INT/XGS INT/GNP RES/EDCountries




Countries

Table 9 (a) Cross Country Comparisons of (External) Debt Indicators(Percent)

Source: Global Development Finance 2001 (World Bank)

The Journal

Dec. 2002

Table 9: (b) Cross Country Comparisons of (External) Debt Indicators(Percent)

1980

SeverelyIndebtedCountries

IndonesiaNigeriaPakistanBangladeshPhilippineMalaysiaThailandTurkeyUruguayEgyptIndiaNepalKoreaMexicoSri Lanka

32.1208.7360.4212.4

44.696.8

333.1104.2207.7136.7

76.0133.7232.4123.4

ED/XGS ED/GNP EDS/XGS INT/XGS INT/GNP

28.014.638.824.053.727.525.927.417.089.211.310.448.526.446.1

ModeratelyIndebtedCountries

LessIndebtedCountries

4.118.323.626.6

6.318.928.018.813.4

9.42.9

20.244.412.0

3.37.96.6

18.24.09.514.910

.68.64.31.9

13.024.6

1.91.51.50.44.62.52.51.21.73.70.40.34.72.82.1

32.5119.315.8

7.822.887.136.517.2

144.713.058.0

133.010.5

2.815.4Countries

Countries

1990



233.9226.4250.0467.5230.1

44.490.0

196.1182.7241.0334.0312.9

45.6191.4210.4




3.68.42.00.74.02.82.42.24.83.11.50.81.02.92.2

12.412.4

5.15.26.7

69.550.615.432.711.06.7

21.642.7

9.87.6

64.0130.7

49.441.969.436.433.432.549.378.326.844.413.941.174.3

33.322.623.028.427.012.616.929.440.822.332.713.410.920.713.7

13.314.610.1

7.813.3

3.46.5

13.517.7

9.619.2

5.53.4

13.46.1

Countries

Countries 1999



255.2190.7342.9216.8110.246.9

129.3193.5175.9154.1139.9219.4

74.2105.1139.5




4.61.11.60.43.03.05.63.12.41.00.90.61.72.71.1

17.6

4.49.2

25.466.635.422.928.047.634.628.457.019.017.3

30.36.0

28.39.8

14.34.8

22.026.225.0

9.015.0

7.924.625.1

7.9

10.42.19.62.65.12.39.1

11.111.54.55.62.43.97.82.6

113.393.458.337.164.862.579.954.336.333.721.357.632.335.560.3

69

RES/ED

Source: Global Development Finance 2001 (World Bank)

70

NIPA Karachi

Vol-7 No. 4

Table 10: (b) Cross Country Comparisons -Indebtedness (1999)(Percent)

Countries PV(EDS)/XGS

IndonesiaNigeriaPakistanBangladeshPhilippineMalaysiaThailandTurkeyUruguayEgypt*IndiaNepalKoreaMexicoSri Lanka

SeverelyIndebted Countries



24618822614811150

128168163

11412273

119103

1039040246659754935

1632314046

Source: Global Development Finance 2001(World Bank)*: Though data is not available, it is classified as moderately indebted country in the GDF 2001

Table 10: (a) Cross Country Comparisons -Indebtedness (1998)(Percent)

Countries PV(EDS)/XGS PV(EDS)/GNP

IndonesiaNigeriaBangladeshIndiaPakistanPhilippineMalaysiaThailandTurkeyUruguayEgyptNepalKoreaMexicoSri Lanka

SeverelyIndebted Countries



23818415114722010254

11617616212911883

12197

848124204257555852383231314443

Source: Global Development Finance 2000(World Bank)

PV(EDS)/GNP

The Journal

Dec. 2002

71

Table 11: Pakistan: History of Paris Club Debt Rescheduling/Restructuring

Terms

AmountsReshd/RestdMillion US$

Maturity(Years)

Grace Period(Years)

December 14,2001January 23,2001January 30,1999January 14,1981

June 28,1974May 26,1972

Ad-HocHoustonHouston

ClassicAd-HocAd-Hoc

12,5001,7523,254

260650234

382015

231815

533

ODA credits Non-ODA credits

15108

Maturity(Years)

Source: SBP Second Quarterly Report for 2001-2002

Grace Period(Years)

72

NIPA Karachi

Vol-7 No. 4

Box 1: Various Terms of Paris Club Resheduling

Classic TermsClassic Terms are the standard terms applied to debtor country coming to the ParisClub.EligibilityAny country that has an appropriate program with the IMF that shows theneed for Paris Club debt relief may benefit from classic terms.DescriptionCredits (whether ODA or non-ODA) are rescheduled at the appropriate marketrate with a repayment profile negotiated on a case - by -case basis.Houston Terms (Septermber 1990; for the lower middle-income countries)Houston terms provide three substantial enhancements over Classic terms:-Non-ODA repayment period = 15 years and ODA repayment period = 20 yearswith a maximum of 10-year grace;-ODA credits are rescheduled at a concessional rate;-Debt Swaps can be conducted on a bilateral and voluntary basis. These swapoperations may be carried out without limit on ODA loans, and up to 20 percent ofthe outstanding amount or 15-30 million SDR for non-ODA credits.EligibilityThere are three criteria for eligibility for these terms (i) low level of income (GDPper capita smaller than US$2,995), (ii) high indebtedness (defined as reaching atleast two of the following three criteria: debt/GDP higher than 50 percent. debt toexports higher than 275 percent, scheduled debt service over exports higher than30 percent); (iii) have a stock of official bilateral debt of at least 150 percent ofprivate debt.Naples Terms (December 1994; for the poorest countries)EligibilityEligibility for the Naples Terms is assessed on a case-by-case basis, taking intoaccount the track record of the debtor country with the Paris Club and the IMF andof various criteria, including having a high level of indebtedness, being only eligiblefor IDA from the World Bank, and having a low GDP-per-capita( 755$ or less ).Description-Naples terms provide the reduction to a 67 percent on Non-ODA to creditor. Creditorscan choose, from one of the two options:1) Debt Reduction option (DR): 67 percent of the claims treated are cancelled, theoutstanding part being rescheduled at the appropriate market rate with 23 yearsrepayment period with a 6-year grace and progressive payments.2) Debt Service Reduction option: the claims treated are rescheduled at a reducedinterest rate with 33 years repayment period with progressive payments.-Two other options were also designed, but have been very seldom used:-Concerning ODA credit are rescheduled at an interest rate at least as favorable asthe original concessional interest rate applying to these loans. This reschedulingresults in a reduction of the net present value of the claims, as the original concessionalrate is smaller than the appropriate market rate.-Debt swaps can be conducted on a bilateral and voluntary basis. These swapoperations may be carried out without limit on ODA loans, and up to 20 percentof the outstanding amount or 15-30 million SDR for non- ODA credits.Source: www. clubdeparis.org

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