Inside Financial Markets
Public debt rises 4pc to Rs40.3trln by end October - Inside Financial Markets

Public debt rises 4pc to Rs40.3trln by end October

– The News

KARACHI: Pakistan’s public debt increased by 4 percent at the end of October 2021, the central bank data showed on Monday.

Analysts said rising interest rates is likely to drive debt servicing cost higher in months ahead. The public debt amounted to Rs40.3 trillion by the end of October. It came at Rs38.7 trillion in June. The debt surged 13.44 percent year on year. It stood at Rs35.5 trillion at the end of October 2020.

The debt represented 74.8 percent of the gross domestic product as of October, compared with 81.1 percent of GDP in June. The widening gap between expenditures and revenues, high-interest payments, currency depreciation, and the accumulation of foreign currency reserves through borrowing contributed towards the large size of the public debt.

The government meets its increased spending requirements through borrowing from domestic sources, largely from commercial banks. The domestic debt slightly increased 0.76 percent to Rs26.467 trillion as of October 31, 2021.

The SBP’s data also showed that external debt originated from multilateral and commercial creditors, rose to Rs13.811 trillion from Rs12.433 trillion. Analysts said high borrowing cost as a result of a hike in interest rates could be a source of worry for the Pakistan Tehreek-e-Insaf (PTI) government.

The government borrowing from the banks is expected to go up after the International Monetary Fund loan facility has resumed last month. Under the IMF programme, borrowing from the central bank is negligible.

The SBP is expected to make a sharp move in the policy rate, taking it closer to a double-digit level in an effort to bring inflation under control. The risks stemming from the balance of payments side could also force the SBP to increase the policy rate by a big margin, rather than measured and gradual. The central bank is likely to raise the policy rate by 100 basis points to 9.75 percent at its upcoming review meeting due on December 14.

Money market yields have been on a rising trend after an unexpected increase in cut-off yields in the last T-Bill auction on Dec 1, 2021, Moreover, Pakistan Investment Bond yields are up 136-144 basis points since the SBP increased the policy rate by 150 bps on November 19. The rise in the interest rates is likely to lead to an increase of Rs270-300 billion in interest payments on the domestic debt in one year.

Syed Zaki Hussain

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)