Public debt surges to Rs70.4tr in July-August

KARACHI: Pakistan’s government debt increased by Rs1.5 trillion or 2.1 per cent to reach Rs70.4 trillion in the first two months of the fiscal year 2025, according to data from the central bank released on Tuesday.

This highlights the government’s necessity to secure financing to meet spending requirements, primarily due to higher debt servicing obligations.

The central government debt increased by 10 per cent year-on-year in August this year. These borrowings saw a 1.1 per cent increase from the previous month. The debt came at Rs69.6 trillion in July. As of June 30, 2024, this stood at Rs68.9 trillion.

The public debt increased mainly due to domestic debt, which rose by 2.5 per cent to Rs48.3 trillion in July-August FY25. The debt increased by 21.5 per cent in August from the year earlier and 1.3 per cent from the previous month.

External debt increased by 1.2 per cent to Rs22 trillion in July-August FY25, rising by 0.5 per cent month-on-month in August, but decreasing by 8.9 per cent, compared to the same period last year.

“The main reason for the increase in the total debt is the need to finance budgetary requirements driven by higher debt servicing obligations,” said Awais Ashraf, the director research at AKD Securities Limited.

“On a positive note, the country’s debt-to-GDP ratio improved, dropping by nearly 10 basis points to 66.5 per cent from 76.2 per cent in August 2023, thanks to a 25.2 per cent growth in nominal GDP and prudent fiscal management,” Ashraf added.

The external debt-to-GDP ratio declined primarily due to the appreciation of the rupee, from 305.61 per dollar in August 2023 to 278.57 in August of the current year.According to some think tanks, Pakistan’s debt has become unsustainable, described as a “raging fire”. The country’s debt and liabilities reached a record high of nearly Rs85 trillion in the fiscal year 2023-24. Due to its increasing financing needs, Pakistan heavily relies on bilateral and multilateral loans.

In late September, Pakistan received $1.03 billion from the International Monetary Fund (IMF) as the first tranche of a $7 billion bailout.Last week, the governor of the State Bank of Pakistan (SBP), Jameel Ahmad, said that the government has started repurchasing its own securities for the first time. This demonstrates that thegovernment has ample funds on hand and can easily meet its financing needs without having to borrow money from banks.

The money market is responding positively as a result, and secondary market yields have fallen significantly. This will contribute to a reduction in borrowing costs, which benefits the economy. Because the government no longer requires as much funding from banks, banks will be able to lend these monies to the private sector, according to the governor.

The second T-bill buyback auction is set for October 9 (Wednesday), which is expected to improve liquidity in the banking sector.Analysts view the T-bills’ buyback as a prudent approach to managing Pakistan’s overall debt position. By retiring debt before its maturity, the government aims to adjust the debt profile from short to long tenors and potentially save on interest costs.

It is estimated that this buyback could save the government Rs11.6 billion and ease the December 2024 debt obligations. The decision for the buyback timing is supported by a recent liquidity boost, driven by Rs2.7 trillion transfers from the SBP to the government.

Also, the ongoing decline in T-bills and Pakistan Investment Bonds (PIBs) yields, along with expectations of further interest rate cuts, are anticipated to help the government reduce interest payments on domestic debt.The SBP is expected to cut rates by a further 200 basis points in both the November and December meetings, following a total rate cut of 450bps since June.