Medium Term Debt Management
Strategy (MTDS)
Debt Policy Coordination Office
Ministry of Finance
Government of Pakistan
Islamabad,
Medium Term Debt Management
Strategy (MTDS)
(2014-18)
Debt Policy Coordination Office
Ministry of Finance
Government of Pakistan
Islamabad,
April 2014
Medium Term Debt Management
Debt Policy Coordination Office
i
Table of Contents
Table of Contents .................................................................................................... i
List of Figures ........................................................................................................ iii
Abbreviations ........................................................................................................ iv
Foreword ................................................................................................................ v
Acknowledgement ................................................................................................. vi
Executive Summary ..............................................................................................vii
1.0
INTRODUCTION ............................................................................................. 1
2.0
OVERVIEW OF PUBLIC DEBT PORTFOLIO (2012-13) ................................. 3
2 (i) Domestic Debt .......................................................................................... 5
2 (ii) External Debt and Liabilities (EDL) ........................................................... 6
2 (iii) Cost and Risk Indicators of Public Debt - End June, 2013 ....................... 7
3.0
MEDIUM TERM MACROECONOMIC FRAMEWORK .................................. 10
3 (i)
Macroeconomic Assumptions ................................................................. 10
3 (ii)
Risks Associated with the Macroeconomic Indicators ............................ 13
4.0
POTENTIAL FUNDING SOURCES ............................................................... 14
4 (i)
Domestic Wholesale Market ................................................................... 14
4 (ii)
Domestic Retail Market - National Saving Schemes ............................... 14
4 (iii)
External Market ....................................................................................... 15
5.0
MEDIUM TERM DEBT MANAGEMENT STRATEGY (MTDS) ...................... 17
5 (i)
Funding Instruments and Baseline Assumptions .................................... 17
5 (ii)
Shock Scenarios ..................................................................................... 19
5 (iii)
Alternative Financing Strategies ............................................................. 21
5 (iv)
Cost - Risk Analysis of Alternative Strategies ......................................... 23
5 (v)
Recommended Strategy ......................................................................... 27
6.0
CONCLUSION AND WAY FORWARD ......................................................... 28
ii
List of Tables
Table 1: Public Debt .............................................................................................. 3
Table 2: Public Debt Servicing - (2012-13) ........................................................... 4
Table 3: Public Debt Cost and Risk Indicators ...................................................... 7
Table 4: Macro-Economic Indicators ................................................................... 10
Table 5: External Inflow ...................................................................................... 16
Table 6: Stylized Instruments .............................................................................. 17
Table 7: Pakistan Financing Strategies ............................................................... 22
Table 8: Pakistan: Portfolio Composition by Strategies ...................................... 23
Table 9: Pakistan Cost and Risk Indicators by Strategies ................................... 24
iii
List of Figures
Fig-1: Evolution of Public Debt …………………………………………………………….4
Fig-2: Outstanding Domestic Debt…………………………………………………………5
Fig-3: Composition of EDL, end-June, 2013……………………………………………..7
Fig-4: External Debt Redemption Profile………………………..…………………….…..9
Fig-5: Domestic Debt Redemption Profile………………………..…………………….…9
Fig-6: Exchange Rate Projections…………………………………………………….….19
Fig-7: Pakistani Domestic Yield Curve……………………………………………….….20
Fig-8: Debt to GDP...………………………………………………………...……….……25
Fig-9: Interest to GDP…………..…………………………………………………………25
Fig-10: Redemption Profile - S1………………………………………….………………26
Fig-11: Redemption Profile - S2……………………………………….…………………26
Fig-12: Redemption Profile - S3….………………………………………………………26
Fig-13: Redemption Profile - S4………………………………………….………………26
iv
Abbreviations
ADB Asian Development Bank
ATM Average Time to Maturity
ATR Average Time to Re-fixing
CDNS Central Directorate of National Savings
DPCO Debt Policy Coordination Office
EAD Economic Affairs Division
EDL External Debt and Liabilities
FRDLA Fiscal Responsibility and Debt Limitation Act, 2005
GDP Gross Domestic Product
GP Fund General Provident Fund
GIS Government Ijara Sukuk
IDB Islamic Development Bank
IMF International Monetary Fund
JPY Japanese Yen
MoF Ministry of Finance
MRTBs Market Related Treasury Bills
MTDS Medium Term Debt Management Strategy
NSS National Saving Schemes
PIBs Pakistan Investment Bonds
PLI Postal Life Insurance
PPG Public and Publically Guaranteed
SBA Stand by Arrangements
SBP State Bank of Pakistan
SDR Special Drawing Rights
T-Bills Treasury Bills
v
Foreword
The present government took office in June 2013 and immediately initiated
actions for restoring economic sustainability and growth. It articulated its economic
vision based on trade and investment, market considerations, enhancing private
sector involvement, limiting itself within the broader limits imposed by the available
resources and broadening the base of resource mobilization for running the
government. It also accorded high priority to resolve energy crisis, up-gradation of
infrastructure base, building up foreign exchange reserves and correcting fiscal
and external imbalances. Such developmental plans/reforms require borrowings
from external and domestic markets. To guide the borrowing activities, the
Government of Pakistan has developed a Medium Term Debt Management
Strategy (MTDS) that is closely linked to its fiscal framework.
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 government’s 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.
I sincerely appreciate the Finance Secretary and his team for their determined
efforts in preparation of Medium Term Debt Management Strategy.
Muhammad Ishaq Dar
Minister for Finance, Revenue, Economic
Affairs, Statistics and Privatization
Government of Pakistan
vi
Acknowledgement
The preparation of Medium Term Debt Management Strategy would not have
been possible without the valuable contribution, assistance and support of many
individuals, organizations, ministries and departments particularly Debt Policy
Coordination Office, State Bank of Pakistan, Economic Affairs Division, Central
Directorate of National Savings, External Finance Wing and Budget Wing.
I would like to recognize the efforts put in by Mr. Sajjad Ahmad Shaikh, Joint
Secretary, Mr. Muhammad Ikram, Deputy Secretary, Mr. Muhammad Umar Zahid,
Financial Analyst, Mr. Arsalan Ahmed, Financial Analyst, Ms. Saadiya Razzaq,
Consultant, Mr. Arslan Shahid, Consultant, Ms. Myra Qazi, Consultant in
preparation and execution of Medium Term Debt Management Strategy. I would
also like to take this opportunity to express gratitude to IMF/World Bank Team for
their technical input.
Waqar Masood Khan
Secretary Finance
Government of Pakistan
vii
Executive Summary
It is imperative to have a comprehensive debt management strategy aiming at
debt sustainability and enhancing the debt servicing capacity of the country.
Owing to its vital importance and indispensable nature, 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.
Pakistan needs to follow the strategy which results in lengthening of its maturity
profile to reduce the refinancing risk along with providing sufficient external inflows
in the medium term to reduce the pressure on domestic resources keeping in view
cost-risk tradeoffs. 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; and (iv) stimulation of external finance.
Pakistan: Medium Term Debt Management Strategy (MTDS)
1
1.0 INTRODUCTION
1.1 The developing countries need to borrow in order to facilitate their
development process. Debt may well act as catalyst in the course of growth
of an economy if it is undertaken to facilitate the well thought out road map
devised with due diligence. Unsustainable level of debt coupled with
absence of prudent debt management strategy plagues economic growth
by lowering the development expenditure due to heavy debt servicing
requirement. This intricate scenario calls for comprehensive and prudent
debt management strategy which ensures the right choices among several
options keeping in view cost and risk tradeoffs, addresses financial
constraints and ensures intergenerational welfare impact.
1.2 Government has developed its first Medium Term Debt Management
Strategy (MTDS) to ensure that both the level and rate of growth in public
debt is fundamentally sustainable and can be serviced under different
circumstances while meeting cost and risk objectives. The MTDS 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.
Objectives & Scope of Medium Term Debt Management Strategy
1.3 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:
− Fulfil 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.
1.4 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.
1.5 The scope of MTDS analysis in this report covers debt contracted by the
federal government which includes on-lending to the provinces. Federal
Pakistan: Medium Term Debt Management Strategy (MTDS)
2
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.
Pakistan: Medium Term Debt Management Strategy (MTDS)
3
2.0 OVERVIEW OF PUBLIC DEBT PORTFOLIO (2012-13)
2.1 The portion of total debt which has a direct charge on government
revenues as well as the debt obtained from IMF is taken as public debt.
Public debt stock recorded at Rs.14,366 billion as on June 30, 2013 (table
1) representing an increase of Rs.1,699 billion or 13 percent higher as
compared with last fiscal year. This increase in public debt is attributed to
financing of fiscal deficit which was recorded at 8 percent of GDP against
the budgeted estimate of 4.7 percent.
2.2 Over the past few years, government relied mainly on the domestic
borrowing which resulted in gradual increase of its share to around 66
percent of the total public debt in 2012-13 compared to 51 percent in 2008-
09. Government borrowings from domestic sources were actually higher
than the overall fiscal deficit in 2012-13 as net external debt payment had
to be paid owing to insufficient fresh external inflows which apart from
putting pressure on domestic resources also resulted in a fall in SBP’s
foreign exchange reserves during 2012-13.
Table 1: Public Debt
2008 2009
2010
2011
2012(P)
2013(P)
(Rs. in billion)
Domestic Debt 3,266 3,852
4,651
6,016
7,637
9,517
External Debt 2,778 3,776
4,260
4,685
5,016
4,849
Total Public Debt 6,044 7,629
8,911
10,700
12,653
14,366
(In percent of GDP)
Domestic Debt 30.7 29.2
31.3
32.9
38.0
41.5
External Debt 26.1 28.6
28.7
25.6
25.0
21.2
Total Public Debt
56.8
57.8
59.9
58.5
63.0
62.7
(In percent of Total Debt)
Domestic Debt 54.0 50.5
52.2
56.2
60.4
66.2
External Debt
46.0 49.5
47.8
43.8
39.6
33.8
(In percent of revenues)
Domestic Debt 217.8 208.1
223.8
267.0
297.6
319.1
External Debt 185.3 204.0
205.0
208.0
195.4
162.6
Total Public Debt
403.1
412.2
428.8
475.0
493.0
481.7
P:Provisional
- The base of Pakistan’s GDP has been changed from 1999-00 to 2005-06
Source: State Bank of Pakistan,
Economic Affairs Division, Budget Wing and Debt Policy Coordination
Office Staff Calculations
2.2 The debt to GDP ratio has remained below 60 percent since 2005-06 until
2010-11. It increased to 63 percent in 2011-12. In 2012-13, the debt to
Pakistan: Medium Term Debt Management Strategy (MTDS)
4
GDP ratio was 62.7 percent. The evolution of public debt along with debt to
GDP ratio is depicted through Fig-1.
2.3 In 2012-13, debt servicing comprised around 41 percent of the total
revenues whereas the debt servicing below 30 percent of the government
revenues is generally considered to be a sustainable level. Public debt
servicing reached at Rs.1,209 billion against the budgeted estimate of
Rs.1,178 billion (table 2). The variation is explained by increased quantum
of domestic borrowing which exceeded the budgeted amount by
approximately Rs.75 billion. Further, analysis reveals that the deviation
from budgeted amount was mainly witnessed in T-Bills and PIBs for the
amount of Rs.48 billion and Rs.21 billion respectively.
Table 2: Public Debt Servicing - (2012-13)
Budgeted Actual (P) Percent of
Revenue
Percent of
Current
Expenditure
(Rs. in billion)
Servicing of External Debt 80.2 70.6 2.4 1.9
Repayment of External Debt 252.0 217.9 7.3 6.0
Servicing of Domestic Debt 845.6 920.4 30.9 25.1
Servicing of Public Debt 1,177.8 1,208.9 40.5 33.0
P: Provisional
Source: Budget Wing and Debt Policy Coordination Office Staff Calculations, Finance Division
3.3
3.9
4.7
6.0
7.6
9.5
2.8
3.8
4.3
4.7
5.0
4.8
56.0%
57.0%
58.0%
59.0%
60.0%
61.0%
62.0%
63.0%
64.0%
-0.5
1.5
3.5
5.5
7.5
9.5
11.5
13.5
15.5
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Fig:1 Evolution of Public Debt
(LHS: in trillions of PKR)
(RHS: percent of GDP)
Domestic (PKR in Trillion) External (PKR in Trillion) Public Debt to GDP
Pakistan: Medium Term Debt Management Strategy (MTDS)
2 (i) Domestic Debt
2.4
Pakistan’s domestic debt comprises permanent debt (medium and long
term), floating debt (short
instruments available under the National Savings Scheme).
2.5
The analysis of domestic debt reveals that the gov
short term borrowing especially from the banking system in 2012
despite the mobilization through National Savings Schemes doubled which
is a predominant source of non
bank borrowing led
servicing in view of higher domestic interest rates. The domestic debt was
increased by Rs.1,880 billion in 2012
recorded at Rs.9,517 billion constituting 41 percent of
component wise
details of domestic debt).
2.6
The composition of domestic debt has witnessed a shift from a high
dominance of unfunded debt to floating debt over past few years. The
unfunded debt comprised 23 percent of total domestic de
compared with 31
floating debt to total domestic debt
This trend shows the government dependence on shorter duration
instruments
over past few years
shorter maturities involve high refinancing and interest rate risk.
617
1,637
1,020
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007-08
Percentage Distribution
Pakistan: Medium Term Debt Management Strategy (MTDS)
Pakistan’s domestic debt comprises permanent debt (medium and long
term), floating debt (short
-
term) and unfunded debt (made up of the various
instruments available under the National Savings Scheme).
The analysis of domestic debt reveals that the gov
ernment relied more on
short term borrowing especially from the banking system in 2012
despite the mobilization through National Savings Schemes doubled which
is a predominant source of non
-
bank borrowing. This increased reliance on
to inflationary pressure and translated
into higher debt
servicing in view of higher domestic interest rates. The domestic debt was
increased by Rs.1,880 billion in 2012
-
13 as compared to last year and
recorded at Rs.9,517 billion constituting 41 percent of
GDP (Annex
details of domestic debt).
The composition of domestic debt has witnessed a shift from a high
dominance of unfunded debt to floating debt over past few years. The
unfunded debt comprised 23 percent of total domestic de
bt in 2012
percent in 2007-08 (Fig-2).
Whereas, the
floating debt to total domestic debt
stood at
55 percent at end
This trend shows the government dependence on shorter duration
over past few years
which
can be source of vulnerability as
shorter maturities involve high refinancing and interest rate risk.
686
798
1,126
1,697
1,904
2,399
3,235
4,143
1,271 1,458 1,656 1,798
2008-09 2009-10 2010-11 2011-12
Fig-2: Outstanding Domestic Debt
(in billion of PKR and percent of Domestic Debt)
Permanent Debt Floating Debt Unfunded Debt
Pakistan: Medium Term Debt Management Strategy (MTDS)
5
Pakistan’s domestic debt comprises permanent debt (medium and long
-
term) and unfunded debt (made up of the various
ernment relied more on
short term borrowing especially from the banking system in 2012
-13
despite the mobilization through National Savings Schemes doubled which
bank borrowing. This increased reliance on
into higher debt
servicing in view of higher domestic interest rates. The domestic debt was
13 as compared to last year and
GDP (Annex
-I for
The composition of domestic debt has witnessed a shift from a high
dominance of unfunded debt to floating debt over past few years. The
bt in 2012
-13
Whereas, the
share of
55 percent at end
-June 2013.
This trend shows the government dependence on shorter duration
can be source of vulnerability as
shorter maturities involve high refinancing and interest rate risk.
2,179
5,196
2,147
2012-13
Pakistan: Medium Term Debt Management Strategy (MTDS)
6
2.7 In 2012-13, the floating debt increased by Rs.1,053 billion. Most of the
proceeds accrued through T-Bills as Rs.538 billion was added in the stock
of June 30, 2012. On the other hand, government borrowed Rs.516 billion
through MRTBs. Government could only adhere to keep its net quarterly
borrowing from the State Bank of Pakistan at zero during the first quarter of
2012-13 as market conditions were more supportive and government
mopped up more than targeted amount from the commercial banks.
However, the government was unable to finance its maturing amount from
commercial banks especially in second quarter of 2012-13 as market
dynamics changed and banks were sensing higher interest rates in view of
large funding needs of the government.
2.8 The amount of permanent debt in the government’s total domestic debt
stood at Rs. 2,179 billion as at end-June 2013, registering an increase of
Rs.482 billion compared with that of last fiscal year. The stock of
permanent debt recorded a 28 percent increase, mainly on account of
higher mobilization through PIBs i.e. Government mopped up net of
retirement Rs.347 billion through PIBs. Government also mobilized net of
retirement Rs.76 billion through GIS and Rs. 56 billion through prize bonds.
2.9 Mobilization through unfunded debt witnessed a sizeable growth as the
government raised Rs.349 billion during 2012-13 compared with Rs.142
billion during the same period last year. In terms of composition, more than
half of the incremental mobilization went into Special Savings Certificates
and Accounts.
2 (ii) External Debt and Liabilities (EDL)
2.10 External Debt and Liabilities (EDL) stock was recorded at US$ 59.8 billion
at end-June 2013 compared with US$ 65.5 billion in 2011-12. Out of EDL,
external public debt amounted to US$ 48.7 billion as at end-June, 2013.
EDL stock witnessed a decline of approximately US$ 5.7 billion during
2012-13 which is a largest ever drop in a single year mainly due to around
US$ 3 billion repayment to the IMF and translation gain of US$ 2.7 billion
on account of appreciation of US Dollar against Japanese Yen. As at end-
June, 2013, EDL is dominated by Public and Publically Guaranteed (PPG)
Debt having share of 74 percent followed by IMF having share of 7 percent
Pakistan: Medium Term Debt Management Strategy (MTDS)
7
(Annex-II for components wise details of external debt). This composition of
EDL is depicted through Fig-3:
2 (iii) Cost and Risk Indicators of Public Debt - End June, 2013
Table 3: Public Debt Cost and Risk Indicators
Risk Indicators
External
Debt
Domestic
Debt
Public
Debt
Amount (Rs. in billion) 4,849 9,517 14,366
Nominal Debt as Percentage of GDP 21.2 41.5 62.7
Cost of Debt Weighted Average IR (%) 1.8 10.7 7.6
Refinancing Risk
Average Time to Maturity (ATM) – Years 9.5 1.8 4.5
Debt Maturing in 1 Year (% of total) 12.8 64.2 46.6
Interest Rate Risk
Average Time to Re-Fixing (ATR) – Years 8.7 1.8 4.2
Debt Re-Fixing in 1 year (% of total) 25.3 67.2 52.8
Fixed Rate Debt (% of total) 84.4 39.6 54.9
Foreign Currency
Risk (FX)
Foreign Currency Debt (% of total debt)
34.2
Other Public Debt
Indicators
Public Debt to Revenue (Percentage)
482
Revenue Balance / GDP
2.8
Primary Balance / GDP
3.6
* Adjusted for grants
Source: Debt Policy Coordination Office Staff Calculations, Finance Division
2.11 The cost and especially risks of the debt portfolio can be described with a
few key parameters. However it is better to consider more than one
indicator as risks to debt composition have several dimensions. Normally,
three kinds of indicators are used for analyzing public debt’s risk level –
measurement of risk that current economic conditions generate over public
debt (foreign currency risk); evaluation of government’s ability to face
PPG
74%
Private Non-
Guaranteed
5%
Public Sector
Enterprises
2%
IMF
7%
Banks
3%
Liabilities to
direct investors
5%
Foreign
Exchange
Liabilities
4%
Fig-3: Composition of EDL, end-June, 2013
(in percent)
Pakistan: Medium Term Debt Management Strategy (MTDS)
8
upcoming contingencies considering certain expected circumstances
(refinancing risk); financial indicators which show the liabilities of market
performance (interest rate risk).
2.12 Pakistan’s total public debt as a percentage of revenues stood at 482
percent during 2012-13, whereas, public debt around 350 percent of
government revenues is generally believed to be within the bounds of
sustainability. Revenue deficit stood at Rs.649 billion or 2.8 percent of GDP
in 2012-13 which reflects the non-availability of fiscal space for undertaking
development spending. Primary deficit stood at Rs.814 billion or 3.6
percent of GDP in 2012-13 which essentially implies that the government is
borrowing to pay interest on the debt stock.
2.13 The cost of current debt portfolio of Pakistan is determined by the weighted
average interest rate which stands at 7.6 percent including National
Savings Schemes (NSS). This number is a combination of average interest
rate of 1.8 percent on external debt and about 10.7 percent on domestic
debt. While interest rates on domestic debt are almost 6 times higher than
those on external debt, this differential fluctuates with the changes in the
exchange rate. For instance, Pak Rupee depreciated against US Dollar on
average by 8 percent in the past 5 years which resulted in increase in
external debt in local currency. This capital loss on foreign currency debt,
however, is mitigated by the strong concessionality element associated
with Pakistan’s external loans. Hence, the cumulative cost of adverse
currency movement and existing external debt rate is still lower than the
cost of domestic debt by 0.9 points.
2.14 Refinancing risk is probably the most significant in Pakistan’s debt portfolio,
driven primarily by the concentration of domestic debt in short maturities.
The Average Time to Maturity (ATM) of total public debt is 4.5 years, with
payment of about Rs.6 trillion of domestic debt is due in 2013-14.
Therefore, in the absence of sufficient external financing inflows and the
current unfavorable Balance of Payment position, refinancing of such a
huge amount will further accentuate the economic situation, thus
compelling the Government to revert to SBP. The ATM of domestic debt is
1.8 years with NSS instruments further compounding the refinancing risk
Pakistan: Medium Term Debt Management Strategy (MTDS)
9
owing to embedded put option. In contrast, ATM of external debt is 9.5
years, indicating limited exposure. Nonetheless, the unfavorable balance of
payment situation and pressure mounting on foreign exchange reserves,
payment of USD 6.2 billion due in 2013-14 may become a challenge if
external position further tightens.
2.15 Around 34 percent of total public debt stock is denominated in foreign
currencies, exposing Pakistan’s debt portfolio to exchange rate risk.
Adjusted for Special Drawing Rights (SDR), the main exposure of
exchange rate risk comes from USD denominated loans (14 percent of total
debt), followed by Japanese Yen (9 percent) and loans denominated in
Euro (7 percent). Depreciation of Pak Rupee would affect both the stock of
government debt as well as debt servicing flows.
2.16 Exposure to interest rate changes is a substantial risk given the short term
nature of domestic securities and external borrowing in floating rates.
Around 67 percent of total domestic debt is exposed to interest rate re-
fixing within 1 year as compared to 25 percent of external debt. Average
time to Re-Fixing (ATR) for domestic debt stands at 1.8 years, comparable
to ATM for domestic debt, while ATR on external debt is significantly longer
at 8.7 years.
-
1
2
3
4
5
6
7
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
(US Dollar in billion)
Years
Fig-4: External Debt Redemption
Profile
(US Dollar in billion)
0
1
2
3
4
5
6
7
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
(Pak Rupee in trillion)
Years
Fig-5: Domestic Debt Redemption
Profile
(Pak Rupee in trillion)
Pakistan: Medium Term Debt Management Strategy (MTDS)
10
3.0 MEDIUM TERM MACROECONOMIC FRAMEWORK
3 (i) Macroeconomic Assumptions
3.1 Government estimated set of macro-economic projections as part of its
medium term budgetary framework. These projections are consistent with
the macro-economic assumptions outlined in the first review of the IMF’s
Extended Fund Facility (EFF) program. The EFF arrangement is expected
to have the support of additional annual US$ 5-6 billion on average from
other development partners during the program period. In addition, the
government aims economic restructuring through measures such as
revenue mobilization, rationalizing expenditure, revitalizing the key public
sector enterprises and resolving energy sector issues to ensure sustainable
growth. The resultant economic growth is expected to contain the future
fiscal deficits. The expected increased external financing along with
curtailed current account deficit will reduce pressure on SBP reserves over
the medium term.
Table 4: Macro-Economic Indicators
Macro
-
Economic Projections
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
GDP growth percent (fc) 3.6 2.8 3.6 3.9 4.7 5.0
Consumer price index
(period average) percent
7.4 11.0* 9.0 7.0 6.0 6.0
Current account deficit
(US $ billion)
(2.5) (2.3) (2.0) (2.6) (4.5) (5.6)
Gross official reserves
(US $ billion)
- in month of imports
6.0 9.4 12.3 16.7 16.8 16.7
1.4 2.1 2.5 3.2 2.9 2.8
(In percent of GDP)
External Debt 24.9 27.7 26.6 25.5 23.9 22.5
Revenues including grants 13.2 14.9 14.9 15.4 15.3 15.2
- Tax revenues 9.7 10.6 11.6 12.2 12.8 12.8
Expenditure 21.0 20.4 19.4 18.8 18.7 18.7
- Current 16.3 16.8 16.3 15.6 15.4 15.2
- Development 4.6 3.6 3.1 3.2 3.4 3.5
Primary Balance (3.5) (0.8) 0.7 1.0 0.8 0.7
Fiscal Balance (7.8) (5.5) (4.4) (3.5) (3.5) (3.5)
*The IMF projection for inflation rate was 7.9 percent for 2013-14, however, in consultation with all stakeholders, it was
unanimously decided to keep it at 11 percent to make it more realistic for MTDS purpose.
Source: Government of Pakistan and IMF Staff Estimates and Projections
Pakistan: Medium Term Debt Management Strategy (MTDS)
11
Economic Growth
3.2 Over the last few years, Pakistan’s economy has been marred with a
deepening security and energy crises, crippling policy inactions and natural
disasters in the shape of floods and torrential rains. These factors have
culminated in economic slowdown with GDP growth rates averaging
around 3 percent during the last five years. However, economic
restructuring as envisaged by the government would improve economic
growth to 5 percent by 2017-18. The steady economic growth would mainly
stem from macro-economic reforms adopted by the government to tackle
the energy crises and revitalize the public sector enterprises; stimulating
economic activity and controlling the resource drainage in the forthcoming
years.
Fiscal Policy
3.3 Fiscal policy is an important component of macroeconomic management.
The government is responding to the current fiscal predicaments through
adopting measures to mobilize tax revenues, expansion of tax base in the
medium term along with raising non-tax revenue. It is expected to
progressively raise the total revenue from 13.2 percent of GDP in 2012-13
to 15.2 percent in 2017-18. Revenue mobilization efforts would be followed
by measures to rationalize non-developmental expenditure through reforms
in the energy sector and public sector enterprises, phasing out subsidies to
curb the drainage of government resources. The government’s fiscal policy
measures are projected to yield a gradual improvement in the fiscal deficit
from its current level of 8 percent to 3.5 percent in 2017-18. Moreover, the
primary balance is expected to be revitalized as the primary deficit of 3.5
percent is forecasted to reach a surplus of 0.7 percent by 2017-18. The
improving fiscal outlook would help contain the government’s financing
needs over the medium term.
Balance of Payments
3.4 Current account deficit stems from imports surpassing exports owing to
economic slowdown and deteriorating exchange rate. During the last few
years, worker remittances have emerged as the key source of foreign
exchange earnings. The launch of Pakistan Remittances Initiative (PRI)
has been instrumental in raising the remittances through official sources
Pakistan: Medium Term Debt Management Strategy (MTDS)
12
from 75 percent in 2009-10 to 90 percent in 2012-13; this trend is expected
to continue in the medium term, enabling the government to stabilize the
current account balance. However, the current account deficit is set to be
poised at 1 percent for 2013-14 before widening to 2 percent by 2017-18.
On the other hand, the capital flows are set to improve through the
issuance of Pakistan Sovereign Bonds and the disbursement of other
program loans hinged with the successful implementation of structural
reforms as envisaged by the government. The improved economic outlook
would lead to a progressive rise in the foreign direct investment from US $
2.6 billion in 2013-14 to US $ 4 billion in 2017-18. The rise in the foreign
direct investment along with the rising net capital inflows and a sustainable
current account balance is projected to stabilize the balance of payments
over the medium term.
Monetary policy
3.5 In the near term, inflation may rise to 11 percent for the year 2013-14
based on the consultation held with various stakeholders. However,
prudent setting of interest rates and a reduction in the funding of deficit
financing through the central bank is projected to account for a reduction in
the inflation rate to 9 percent by 2014-15. The government aims to reduce
inflation to 6 percent by the year 2017-18 providing stability to the overall
macroeconomic outlook of the country.
3.6 Owing to weaker growth in exports, deteriorating exchange rates and
drying external inflows, the foreign exchange reserves with the State Bank
of Pakistan have substantially declined. The external deficit financing
amounting to US$ 2 billion and IMF SBA repayments of US$ 2.5 billion
executed through liquid foreign exchange reserves resulted in decline in
SBP reserves from US$ 10.8 billion at the start of the year to around US$ 6
billion at the end of 2012-13. However, the official foreign reserves are
projected to rise to US $ 9.4 billion in 2013-14 and US $ 16.7 billion by
2017-18. The growth in the foreign exchange reserves is hinged with
positive capital inflows and a rise in direct foreign investment. The
exchange rate is expected to stabilize over the period owing to sustained
economic growths, reduction in fiscal deficits and easing pressure on
balance of payments.
Pakistan: Medium Term Debt Management Strategy (MTDS)
13
3 (ii) Risks Associated with the Macroeconomic Indicators
3.7 The above mentioned estimates are exposed to certain risks and
vulnerabilities that could cause deviations from the projections. The
adverse security situation along with impeding energy crises, high fiscal
deficits, rising inflation and inefficient public sector enterprises could peg
back the growth projections.
3.8 A stifled economy could slow down revenue mobilization, create pressure
on the government’s resources through increased subsidies, thereby
widening the fiscal deficits. The rising fiscal deficits could increase the
country’s borrowing requirements, thereby raising the public debt which can
be translated into higher debt servicing. Moreover, inefficient Public Sector
Entities could further expose the economy to rising contingent liabilities
carrying the impediment for such liabilities to be consolidated into the public
debt stock.
3.9 Reduction in external inflows could depreciate the rupee leading to rising
import bills and increasing inflation. This could also cause a shift in the
funding strategies from external to the domestic markets carrying the risk of
crowding out of private sector credit and rising domestic interest rates. The
lack of structural reforms to the economy could slow down the exports
causing a widening current account deficit which may hamper the growth
and accumulation of the foreign exchange reserves and create pressure on
the country’s exchange rates. In addition, reduction in foreign direct
investment and a potential curtailment of the donors’ loans could pose
balance of payments crises.
Pakistan: Medium Term Debt Management Strategy (MTDS)
14
4.0 POTENTIAL FUNDING SOURCES
4.1 Government meets its financing requirements from both domestic and
external sources. Local sources mainly include issuance of government
securities and receipt of deposits through National Savings Schemes
(NSS). The external sources include loans from multilateral, bilateral
creditors, issuance of bonds in the international capital markets and raising
of short term foreign currency loans.
4 (i) Domestic Wholesale Market
4.2 The MTBs, PIBs, MRTBs and GIS are the main instruments for domestic
debt. PIBs and MTBs are issued through auction in primary market
whereas MRTBs are purchased and held by SBP. The PIBs and GIS are
medium and long term securities, whereas, MTBs are short term
instruments having maturity up to one year. MRTBs are issued for a
period of six months. The issuance of MTBs, PIBs and GIS will continue
to be a source of funding for the government. Government has already
listed these securities on the stock exchanges which will help in
strengthening the debt capital market, creating a competitive environment,
widening the investor base through taping the retail investor.
4.3 Government will focus on the Islamic and long term financial instruments to
augment the absorption capacity of the market. The growth in Islamic
securities and PIBs since 2009 suggests that these instruments may
absorb the increasing demand to the tune of over Rs.500 billion each
in nominal terms in the entire financial market.
4 (ii) Domestic Retail Market - National Saving Schemes
4.4 National Saving Schemes (NSS) are designed to collect savings mainly
from retail investors which was 26 percent of total domestic debt at end-
June, 2013. They grew continuously in real terms due to the attractive
rates of return combined with the option for early redemption. NSS seems
supportive to absorb growing need for financing.
4.5 The future trend of existing instruments depict that the average share of
Prize Bonds, Regular Income Certificates (RIC), and Pensioners Benefit
Account (PBA) & Behbood Savings Certificates (BSC) in NSS during the
last 5 years remained 15%, 8.5%, 7.5% & 21% respectively. Similar trend
Pakistan: Medium Term Debt Management Strategy (MTDS)
15
is also expected in comings years in the light of response of investors
during last 5 years.
4.6 Government has already introduced unconventional schemes to cater
social & ethnic dimension of the country i.e. PBA & BSC. Moreover,
proposals like Sharia Compliant Paper and Registered Prize Bonds are in
process. In the recent past, CDNS introduced Student Welfare Prize
Bond having denomination of Rs.100/-. CDNS has also successfully
launched prize bond of Rs.25,000/- denomination and Short Term Savings
Certificates (03 Month, 06 Months and 12 Month maturity) during last
two years to attract the potential investment and to diversify the basket
of retail government securities.
4.7 CDNS has also taken measures to enhance its coverage through
developing secondary domestic market. Efforts are also underway to
facilitate Non-Resident Pakistanis (NRPs) to invest in NSS through an
online investment portal in coordination with sophisticated banking
channels.
4 (iii) External Market
4.8 External debt is mainly obtained through loans from multilateral and
bilateral donors with medium and long term maturity. Disbursement of
project based loans is dependent on the implementation capacity and
efficiency of the implementing entity. It is expected that as a result of
special attention to enhance the project implementation process, project
based disbursements would increase in the medium term. Policy based
funding is linked with the macroeconomic stability. The structural changes
initiated by the government would result in macroeconomic stability
augmenting the path for policy lending from multilateral partners during the
coming years. Government is also planning to obtain loans from IDB to
fulfill short term financing requirements. Besides, the government plan to
secure external financing from the international financial markets which is
expected to reduce pressure on the domestic liquidity. The estimates of
external flows are given in table 5.
Pakistan: Medium Term Debt Management Strategy (MTDS)
16
Table 5:
External Inflow
2013
-
14
2014
-
15
2015
-
16
2016
-
17
Euro Bond 2,000 500-750 500-750 500-750
Commercial 400 - - -
IDB 782 500 500 500
Program Loans
- World Bank
- ADB
- SAFE China Deposits
2,400
2,500
2,000
2,000
1000 1,000 500 500
400 500 500 500
1,000 1,000 1,000 1,000
Project Loans
2,978
2,200
2,300
2,400
Source: External Finance Wing, Finance Division
Multilateral and Bilateral
4.9 With improved macroeconomic indicators coupled with enhancing the pace
of project implementation process, disbursement from multilateral and
bilateral creditors would increase during the next few years. It is anticipated
that average yearly financial support from these partners would be around
US$ 6 billion during the program period.
Eurobonds
4.10 Pakistan had earlier issued three Eurobonds that mature in 2016, 2017,
and 2036. Government recently tapped International Bond and was
received with a overwhelming response i.e. government was able to raise
US$ 2,000 million against the target of US$ 500 in 2013-14. It is envisaged
that Pakistan Sovereign Bond amounting US$ 500 million will be issued
every year until 2017-18.
Pakistan: Medium Term Debt Management Strategy (MTDS)
17
5.0 MEDIUM TERM DEBT MANAGEMENT STRATEGY (MTDS)
5.1 The MTDS is developed for the period 2014-18 based on the public debt
outstanding as on June 30, 2013 in accordance with the scope defined
in section 1.
5.2 Under the alternative interest rates and exchange rates scenarios, the four
different borrowing strategies have been assessed with associated cost/risk
analysis. These alternative strategies are evaluated using the MTDS
analytical tool. The cost and risk trade off analysis is based on the existing
debt cash flows, market and macroeconomic projections and alternative
borrowing strategies under different scenarios.
5 (i) Funding Instruments and Baseline Assumptions
5.3 For future borrowing strategies, the MTDS analysis considers fourteen
stylized instruments (table 6) consisting six instruments reflecting external
sources of financing and eight instruments in domestic currency. Further
details of these instruments include interest rate type (fix or variable),
degree of concessionality (concessional, semi concessional or market
rate).
Table 6: Stylized
Instruments
# Instrument Type / Name DX / FX
Interest
Type
Concessionality
Maturity
(years)
Grace
Period
(years)
1 Concessional_USD_Fixed_40 External Fixed Concessional 40
10
2 Concessional_EUR_Fixed_40 External Fixed Concessional 40
10
3 Semiconc_USD_Fixed_25 External Fixed Semi-Concessional
25
10
4 Semiconc_USD_Var_25 External Variable
Semi-Concessional
25
10
5 Semiconc_JPY_Fixed_25 External Fixed Semi-Concessional
25
10
6 Eurobond_USD_Fixed_10 External Fixed Market 10
9
7 Bonds_PKR_Fixed_10 Domestic
Fixed Market 10
9
8 Bonds_PKR_Fixed_5 Domestic
Fixed Market 5
4
9 Bonds_PKR_Var_3 Domestic
Variable
Market 3
2
10 Retail_PKR_Fixed_10 Domestic
Fixed Market 10
9
11 Retail_PKR_Fixed_3 Domestic
Fixed Market 3
2
12 T-bills_PKR_Fixed_1 Domestic
Variable
Market 1
0
13 MR T-bills_PKR_Fixed_1 Domestic
Variable
Market 1
0
14 Bonds_PKR_Var_10 Domestic
Variable
Market 10
9
Source: Debt Policy Coordination Office Staff Calculations, Finance Division
Pakistan: Medium Term Debt Management Strategy (MTDS)
18
5.4 The loans from multilateral sources are labeled as “Concessional” and
aggregated under two similar stylized instruments i.e. one in US Dollar
(with an average interest rate of 0.8 percent) and other in Euro (with an
average interest rate of 1.5 percent).
5.5 “Semi-Concessional” loans include budget support and project loans from
bilateral sources. These loans are categorized in three instruments; two in
US Dollar (one with fixed interest rate and other with floating rate) and one
in JPY with fixed interest rate. The US Dollar instruments are priced on the
forward swap curve and the 6 month JPY LIBOR plus the historic premia,
whereas, the JPY instrument is priced at current ADB premium i.e. this
premium represents the degree of concessionality at which the creditors
are providing loans to Pakistan.
5.6 For Eurobonds, 10 years interest rate projections are based on US treasury
forward rate and the risk premium taken from the implied risk premium from
current Eurobonds in the secondary market.
5.7 Wholesale domestic market instrument are categorized as one year T-Bill,
MRTBs, 3 year GIS, 5 year and 10 year PIBs. The T-Bills (3, 6 and 12
months) are categorized in one year instrument given the functionality of
analytical tool. Projected short-term interest rates are based on the
expected future real SBP policy rate plus the projected inflation. Yield curve
is constructed by adding a term premia to the nominal policy rate with the
term premia derived from the spot yield curve and assumed to be constant
over time in the baseline scenario.
5.8 The retail NSS instruments are categorized by two stylized instruments of 3
and 10 years which reflect the assumption of likelihood of realizing these
maturities. The NSS instruments are priced at 95 percent of the rates used
for PIBs of the respective tenors.
5.9 As the government envisages extending the maturities in the domestic
market, a 10 year maturity floating rate PIB has been added to the analysis.
The reference interest rate is one year treasury bill rate.
5.10 The forward rates of US$, JPY and Euro are used to project the future
exchange rates for Pak Rupee which include the adjustments expected by
the government for 2014 and 2015. Future exchange rates of the Pak
Rupee against the JPY and Euro are based on US Dollar vs. Pak Rupee
Pakistan: Medium Term Debt Management Strategy (MTDS)
19
exchange rate projections and forward cross currency rates between the
US Dollar and the JPY and Euro respectively.
5 (ii) Shock Scenarios
5.11 The robustness of alternative debt management strategies was evaluated
by applying four stress/shock scenarios for exchange rates and interest
rates. These shocks to market variable are assumed not to affect other
macroeconomic parameters such as inflation, GDP and primary deficit. In
addition, the probability of the shocks happening is assumed to be same for
all strategies.
I. Exchange Rate Shock
5.12 A 30 percent depreciation of Pak Rupee against US Dollar and Euro, and
50 percent depreciation against JPY in the fourth year of analysis i.e. 2017
has been assumed. This estimation is based on the maximum annual
changes recorded between 2005 and 2013.
II. Large Interest Rate Shock
5.13 For the domestic interest rate flattening of the yield curve is assumed i.e.
an increase of 350 bps for MTBs and 170 bps for 10 year PIBs. This shock
is taken according to the historic trend of increase in the policy rate
80
90
100
110
120
130
140
150
160
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Fig-6:Exchange Rate Projections
Baseline 30% FX Shock
Pakistan: Medium Term Debt Management Strategy (MTDS)
20
coincided with a reduction in term spread between MTBs and PIBs. The
foreign currency reference rates are assumed to increase in-line with their
maximum annual increase over last 18 years. Additionally, Pakistani credit
spread is assumed to increase by 400 bps which is still less than the
extreme point observed historically.
III. Limited Interest Rate Shock
5.14 For this stress scenario, an increase in Pakistani credit spread over US
treasury rates of 200 bps is assumed which will also affect the Eurobond
yield. The domestic yield curve is shocked by a parallel upward shift of 200
bps. The US treasury rates are assumed at 1 percent and increase in
Japanese government rate is assumed at 0.5 percent which is half of the
historic observation in last 18 years.
IV. Combined Shock
5.15 Under this scenario, both exchange rate and interest rate are changed
simultaneously i.e. 15 percent depreciation of Pak Rupee against the US$
and Euro and 25 percent depreciation against JPY has been assumed in
2017. The interest rate sock is assumed according to the limited interest
rate shock scenario.
7%
8%
9%
10%
11%
12%
13%
1 Year 3 Years 5 Years 10 Years
Fig-7:-Pakistani Domestic Yield Curve
Baseline Scenario
Limited Interest Rate Shock
Large Interest Rate Shock
Pakistan: Medium Term Debt Management Strategy (MTDS)
21
5 (iii) Alternative Financing Strategies
5.16 The MTDS provides alternative strategies to meet the financing
requirements for Pakistan. The strategies are shown by the breakdown of
funding mix (domestic vs. external debt) and within the broad categories of
domestic and external, the share of each stylized instrument has also been
illustrated. While designing these strategies, the refinancing and exchange
rate risk was given more importance. Following four strategies are
assessed by the government:
I. Strategy 1 (S1: Planned Strategy)
5.17 This strategy represents the borrowing from external and domestic sources
as planned by the government for 2014 onwards. Gross external borrowing
accounts on average 7 percent mainly through Eurobonds, commercial
sources and project loans. The remaining 93 percent borrowing need is
expected to be met by MTBs, PIBs, 3 year GIS, NSS instruments, and
MRTBs. The MTBs is expected to contribute on an average over half of the
gross domestic funding and the rest absorbed by the longer tenor
instruments. The strategy represents a scenario where new external
borrowing is projected to be more than 20 percent of net borrowings over
the MTDS period.
II. Strategy 2 (S2: Lengthening of Maturity Profile - Fixed Rate
Instruments)
5.18 This strategy represents the cost and risk scenario of debt portfolio by
shifting part of MTBs to 10 year PIBs and increasing the external funding
slightly at the same time. The additional external financing will be sought as
per official estimate i.e. the higher project loans as compared to S1. The
share of stylized instruments under external debt has been slightly changed
compared with S1. The domestic financing will be available from PIBs, GIS,
NSS instruments and MTBs which will be rolled over with slight growth.
III. Strategy 3 (S3: Reliance on Short Term Domestic Instruments)
5.19 S3 assumes more reliance on domestic market and reduced external
funding. Under this strategy, it is assumed that on an average, 97 percent
of financing requirements would be derived from domestic sources mainly
Pakistan: Medium Term Debt Management Strategy (MTDS)
22
by issuance of MTBs and MRTBs. This scenario assumed the unavailability
of the projected disbursements from multilateral, bilateral and international
capital market. However, this strategy can complicate the domestic market
by creating high demand for short term maturity instruments.
IV. Strategy 4 (S4: Lengthening of Maturity Profile - Floating Rate
Instruments)
5.20 This strategy is similar to S2 in terms of share of domestic and external
financing except a new instrument having 10 year maturity with floating rate
is included i.e. the instrument accounts for almost 9 percent of the domestic
borrowing on an average basis over the MTDS period. This strategy aims
to lengthen the maturity profile while reducing refinancing risk. The said
instrument can be PIBs or GIS.
Table 7: Pakistan Financing Strategies (in percent of gross borrowing over
2014-18)
New debt
S1
S2
S3
S4
Concessional_USD_Fixed_40 External 0.6
0.8
0.3
0.8
Concessional_EUR_Fixed_40 External 0.6
0.8
0.3
0.8
Semiconc_USD_Fixed_25 External 1.9
2.4
1.1
2.4
Semiconc_USD_Var_25 External 1.9
2.4
1.1
2.4
Semiconc_JPY_Fixed_25 External 0.8
1.0
0.4
1.0
Eurobond_USD_Fixed_10 External 1.1
1.3
0.0
1.3
Bonds_PKR_Fixed_10 Domestic 2.3
9.1
1.1
1.0
Bonds_PKR_Fixed_5 Domestic 1.9
0.9
0.9
0.8
Bonds_PKR_Var_3 Domestic 2.6
2.0
2.7
1.9
Retail_PKR_Fixed_10 Domestic 1.9
1.8
1.0
1.8
Retail_PKR_Fixed_3 Domestic 9.1
9.0
7.0
9.0
T-bills_PKR_Fixed_1 Domestic 48.3
41.1
57.0
41.1
MR T-bills_PKR_Fixed_1 Domestic 27.0
27.4
27.2
27.4
Bonds_PKR_Var_10 Domestic 0.0
0.0
0.0
8.2
External 6.9
8.6
3.2
8.7
Domestic 93.1
91.4
96.8
91.3
Total 100.0
100.0
100.0
100.0
Source: Debt Policy Coordination Office Staff
Calculations, Finance Division
Pakistan: Medium Term Debt Management Strategy (MTDS)
23
Table 8: Pakistan: Portfolio Composition by Strategies
Outstanding by instrument
(in percent of Total)
2012
-
13
As at end of 2017
-
18
Current
S1
S2
S3
S4
Concessional_USD_Fixed_40 5.4
4.6
4.7
4.0
4.7
Concessional_EUR_Fixed_40 8.5
7.0
7.1
6.4
7.2
Semiconc_USD_Fixed_25 3.8
6.1
6.6
4.7
6.6
Semiconc_USD_Var_25 5.4
6.3
6.8
5.0
6.9
Semiconc_JPY_Fixed_25 8.6
7.4
7.5
6.5
7.6
Eurobond_USD_Fixed_10 1.1
2.5
2.7
0.2
2.7
Bonds_PKR_Fixed_10 4.1
6.9
18.7
4.6
4.0
Bonds_PKR_Fixed_5 5.4
3.8
1.7
2.0
1.5
Bonds_PKR_Var_3 3.3
3.0
2.5
4.2
2.5
Retail_PKR_Fixed_10 3.2
5.1
4.5
3.5
4.6
Retail_PKR_Fixed_3 13.9
13.4
11.4
11.8
11.3
T-bills_PKR_Fixed_1 21.0
23.0
16.3
33.0
16.0
MR T-bills_PKR_Fixed_1 16.3
10.9
9.7
14.1
9.5
Bonds_PKR_Var_10 0.0
0.0
0.0
0.0
15.0
External 32.9
33.9
35.3
26.8
35.7
Domestic 67.1
66.1
64.7
73.2
64.3
Total 100.0
100.0
100.0
100.0
100.0
Source: Debt Policy Coordination Office Staff Calculations, Finance Division
5 (iv) Cost - Risk Analysis of Alternative Strategies
5.21 The cost indicators (ratios) selected for the analysis are debt to GDP and
interest payment to GDP. The performance of each strategy is reviewed to
evaluate the variations in these cost indicators. Exchange rate variations
can have an impact on the debt stock, accordingly, the debt to GDP ratio is
critical to analyze in this context. Similarly, interest payments to GDP
evaluate the impact on budget balance in case of each strategy.
5.22 To evaluate the strategies, the number of risk indicators have been
examined such as ATM and ATR which reflect rollover and interest rate risk
respectively. The methodology and analysis of cost-risk indicators will
assist in obtaining the desired portfolio mix for debt effective management.
The risk has been computed by taking the maximum deviation from the
Pakistan: Medium Term Debt Management Strategy (MTDS)
24
baseline scenario. The outcome at the end of 2017-18 is used and the cost
and risks comparison of the alternative strategies under the shock scenario
is discussed in detail.
Table 9: Pakistan Cost and Risk Indicators by Strategies
Risk Indicators
2012-13
Current
As at end of 2017-18
S1 S2 S3 S4
Nominal debt as percent of GDP 60.9*
51.5
52.0
51.2
51.4
Implied interest rate (percent) 7.7
7.1
7.4
7.1
7.0
Refinancing risk
ATM External Portfolio (years) 10.1
12.8
13.0
12.1
13.0
ATM Domestic Portfolio (years) 1.8
2.5
3.6
1.9
3.6
ATM Total Portfolio (years) 4.5
6.2
7.1
4.8
7.1
Debt maturing in 1 year percent of total
46.0
40.0
31.6
53.3
31.2
Domestic debt maturing in 1 year
percent of total
64.2
59.8
47.9
71.9
47.5
Interest rate risk
ATR (years) 4.2
5.4
6.3
4.2
5.3
Debt Re-fixing in 1yr (percent of total) 52.4
49.1
40.6
61.6
55.2
Fixed rate debt (percent of total) 54.0
56.7
64.8
43.8
50.2
Foreign Currency
Risk
FX debt as percent of total 32.9
33.9
35.3
26.8
35.7
FX debt (payable in one year) as
percent of reserves
68.5
15.5
15.5
15.5
15.5
*Based on the MTDS Scope
Source: Debt Policy Coordination Office Staff Calculations, Finance Division
5.23 For the baseline scenario, the estimation shows a decrease in debt to GDP
ratio (60.9 percent in 2012-13) in the range of 51.2 percent to 52 percent by
end of 2017-18, depending upon the selection of strategy. The decrease in
debt to GDP ratio is mainly due to the primary surplus expected to realize
from 2014-15 onwards.
5.24 In terms of cost, strategies follow almost the same order for both indicators.
In terms of risk, they show substantial variation. The trade- offs between
cost and risk need to be made to arrive at the preferred strategy. There is a
large deviation from baseline scenario for all strategies for debt to GDP
ratio when exchange rate shock is applied. The interest rate shock also
generated high variations for all the strategies.
Pakistan: Medium Term Debt Management Strategy (MTDS)
25
5.25 As depicted above, S3 seems to perform well in terms of debt to GDP ratio
as lower proportion of financing from external sources are assumed i.e.
there is non-issuance of expensive Eurobonds which appear to
compensate the lower than expected disbursement of the cheaper
multilateral debt. The foreign exchange risk in S3 is also less due to lower
proportion of external debt. However, a caution is needed while making any
conclusion as the S3 represents the scenario where macroeconomic
indicators would not be the same as projected and higher funding would be
required from domestic sources at higher cost.
5.26 S3 seems to perform well in terms of foreign exchange risk due to lesser
external financing, however, it will result in increasing the refinancing risk
with total repayment reaching around 72 percent of domestic debt portfolio
by the end of 2018. Keeping in view the market absorption capacity, such
strategy may not be practical and feasible. Identification of relevant strategy
needs a meticulous appraisal of the cost and risk keeping in view the debt
portfolio’s exposure to different risks.
5.27 Both S2 and S4 are targeting the reduction of refinancing risk. From cost
perspective, S4 has the lowest interest cost which can be attributed to the
introduction of 10 year floating instrument along with the increased external
financing. S2 seems a costly alternative due to the higher rate of 10 year
instrument with fixed interest rate as compared with floating one.
5.28 From the risk perspective, S2 and S4 perform well as compared with S3
due to the fact that S3 have higher share of domestic debt with short term
S1
S2
S3
S4
51.1
51.2
51.3
51.4
51.5
51.6
51.7
51.8
51.9
52.0
52.1
4.70 5.20 5.70
Cost (%)
Risk
Fig-8: Debt to GDP
(as at end of 2017-18)
S1
S2
S3
S4
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
1.20 1.25 1.30 1.35 1.40
Cost (%)
Risk
Fig-9: Interest to GDP
(as at end of 2017-18)
Pakistan: Medium Term Debt Management Strategy (MTDS)
26
maturities and thus entails higher refinancing risk. S2 and S4 have similar
risk trend for debt to GDP as both have same share of external funding and
thus foreign exchange risk is similar. But in terms of interest rate risk, S2
seems better than S4 owing to the 10 year fixed instrument.
5.29 The S1, the planned strategy is somewhere at the middle in terms of cost
and risk. It is a strategy which aims to manage the refinancing risk as well
as foreign exchange risk at the same time assuming the realized
disbursement of project loans and utilizing all the domestic instruments of
different maturities.
5.30 The average time to maturity is improving for all the strategies even for the
domestic debt. Whereas, the share of domestic debt maturing in 1 year is
more than 50 percent in S1 and S3. The redemption profile reflects a
0
2
4
6
8
10
12
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Fig-11: Redemption Profile - S2
(PKR in trillion)
Domestic External
0
2
4
6
8
10
12
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Fig-10: Redemption Profile - S1
(PKR in trillion)
Domestic External
0
2
4
6
8
10
12
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Fig-12: Redemption Profile - S3
(PKR in trillion)
Domestic External
0
2
4
6
8
10
12
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Fig-13: Redemption Profile - S4
(PKR in trillion)
Domestic
External
Pakistan: Medium Term Debt Management Strategy (MTDS)
27
higher refinancing risk in the short term even if the government is able to
attract all external funding sources as envisaged under S2 and S4.
5.31 Average time to re-fixing is higher in S2 as compared to S4 while the
refinancing risk is similar for both the strategies. S2 has highest ATR as it
assumes the instant shifting to the longer maturity instruments with fixed
rate.
5 (v) Recommended Strategy
5.32 An important consideration when comparing alternative debt management
strategies is a strategy which would best satisfy government's stated debt
management objectives to insure its financing at minimum cost and risk
while developing domestic debt market. Government needs to follow the
strategy which results in lengthening of its maturity profile to reduce the
refinancing risk along with providing sufficient external inflows in the
medium term to reduce the pressure on domestic resources keeping in
view cost-risk tradeoffs.
5.33 On the basis of cost and risk analysis of alternative strategies, a strategy,
such as S3, with an increased reliance on domestic short term sources is
least attractive. S2 and S4 assume lengthening of maturity profile by
issuing fixed and floating rate instruments, respectively. Moreover, S2 and
S4 have similar risk trend for debt to GDP as both have same share of
external funding and thus foreign exchange risk is similar. Both S2 and S4
are targeting the reduction in refinancing risk. However, S2 is expected to
result in greater average time to re-fixing i.e. there is less interest rate risk
in case of S2 as compared with S4 owing to more financing through
issuance of fixed interest rate instruments. The implementation of S2
seems feasible than others considering the current appetite for the fixed
rate longer tenor instruments. This is further supported by the fact that the
Government of Pakistan was able to raise substantial amount during 2013-
14 through PIBs. In the light of above mentioned facts, S2 seems to be a
preferential strategy for the government.
Pakistan: Medium Term Debt Management Strategy (MTDS)
28
6.0 CONCLUSION AND WAY FORWARD
6.1 Medium Term Debt Strategy is suggestive in nature which guides the
government to meet its financing requirements taking into consideration
cost and risk objectives. The MTDS estimation shows a decrease in debt to
GDP ratio in the range of 51.2 percent to 52 percent by end of 2017-18,
depending upon the selection of strategy.
Proposed Short Term Actions
6.2 To start with, debt management function within the Ministry of Finance
could be centralized with DPCO assuming enhanced responsibilities.
However, this would only be possible after its capacity building through
hiring of qualified staff on permanent basis. Currently, there is a ban on
recruitment which could delay this process.
6.3 The MTDS guidelines could be translated in to annual borrowing plan
which may specify types of instruments, volume and distribution of
financing throughout the year. A detailed borrowing plan is especially
important for domestic borrowing, where transparency and predictability are
essential for the well-functioning of auctions and also for the secondary
market.
Proposed Medium to Long Term Actions
6.4 Government intends to strengthen public debt management functions as
the debt management operations are fragmented across several agencies
and presently the DPCO has a limited role in public debt management. In
the medium term, the government plans to convert DPCO into a Debt
Management Unit with enhanced responsibilities to administer the
government’s financial obligations and cash flows. The unit will ensure the
government’s financing at the lowest possible cost given risk exposure
parameters, and will seek to improve the benchmarking of issues to
develop a deeper financial market. As a prerequisite,
− DPCO needs recruitment of additional qualified professional staff on
permanent basis.
− There is a need to revisit the FRDL Act, 2005.
Under this vision, the DPCO will become a pool of financial expertise with prime
focus on public debt management.
Annex:I - Domestic Debt
2008 2009 2010 2011 (P) 2012 (P) 2013 (P)
Permanent Debt 616.8 685.9 797.7 1125.6 1,697 2,179.2
Market Loans 2.9 2.9 2.9 2.9 2.9 2.9
Government Bonds 9.4 7.3 7.2 0.7 0.7 0.7
Prize Bonds 182.8 197.4 236.0 277.1 333.4 389.6
Foreign Exchange Bearer Certificates 0.2 0.2 0.1 0.1 0.1 0.1
Bearer National Fund Bonds 0.0 0.0 0.0 0.0 0.0 0.0
Federal Investment Bonds 1.0 1.0 0.0 0.0 0.0 0.0
Special National Fund Bonds 0.0 0.0 0.0 0.0 0.0 0.0
Foreign Currency Bearer Certificates 0.0 0.0 0.0 0.0 0.0 0.0
U.S. Dollar Bearer Certificates 0.0 0.0 0.0 0.0 0.0 0.0
Special U.S. Dollar Bonds 8.3 7.7 2.7 1.0 0.9 4.2
Government Bonds Issued to SLIC 0.6 0.6 0.6 0.6 0.6 0.6
Pakistan Investment Bonds (PIB) 411.6 441.0 505.9 618.5 974.7 1,321.8
Government Bonds issued to HBL 0.0 0.0 0.0 0.0 - -
GOP Ijara Sukuk 0.0 27.8 42.2 224.6 383.5 459.2
Floating Debt 1,637.4 1,904.0 2,399.1 3,235.4 4,143.1 5,196.2
Treasury Bills through Auction 536.4 796.1 1,274.1 1,817.6 2,383.4 2,921.0
Rollover of Treasury Bills discounted SBP 0.6 0.5 0.5 0.5 0.5 0.5
Treasury Bills purchased by SBP (MRTBs) 1,100.4 1,107.3 1,124.4 1,417.3 1,759.2 2,274.7
Outright Sale of MTBs
Unfunded Debt 1,020.4 1,270.5 1,457.5 1,655.8 1,798.0 2,146.5
Defence Savings Certificates 284.6 257.2 224.7 234.5 241.8 271.7
Khas Deposit Certificates and Accounts 0.6 0.6 0.6 0.6 0.6 0.6
National Deposit Certificates 0.0 0.0 0.0 0.0 0.0 0.0
Savings Accounts 27.7 16.8 17.8 17.2 21.2 22.3
Mahana Amadni Account 2.5 2.4 2.2 2.1 2.0 2.0
Postal Life Insurance 67.1 67.1 67.1 67.1 67.1 67.1
Special Savings Certificates and Accounts 227.6 377.7 470.9 529.1 537 734.6
Regular Income Scheme 51.0 91.1 135.6 182.6 226.6 262.6
Pensioners' Benefit Account 87.7 109.9 128.0 146.0 162.3 179.9
Bahbood Savings Certificates 229.0 307.5 366.8 428.5 480.8 528.4
National Savings Bonds - - 3.6 3.6 3.6 0.2
G.P. Fund 42.5 40.1 39.9 44.3 54.5 73.1
Short Term Saving Certificate 4.0
Total Domestic Debt 3274.5 3860.4 4654.3 6016.7 7638.1 9,521.9
Total Domestic Debt (Excluding Foreign
Currency Debt included in External Debt)
3,266.0 3,852.5 4,651.4 6,015.5 7,637.0 9,517.4
P: Provisional
Rs.in billion
2008 - 2013
Source: State Bank of Pakistan, Budget Wing and Debt Policy Coordination Office Staff Calculations
Annex:II - External Debt and Liabilities (EDL)
2008 2009 2010 2011 (P) 2012 (P) 2013 (P)
1. Public and Publically Guaranteed Debt 40.6 42.6 43.1 46.5 46.4 44.4
i) Public Debt 40.4 42.4 42.9 46.4 46.2 43.5
A. Medium and Long Term(>1 year) 39.7 41.8 42.1 45.7 45.6 43.5
Paris Club 13.9 14.0 14.0 15.5 15.0 13.5
Multilateral 21.4 23.0 23.7 25.8 25.3 24.2
Other Bilateral 1.1 1.4 1.8 1.9 2.5 2.9
Euro Bonds/Saindak Bonds 2.7 2.2 1.6 1.6 1.6 1.6
Military Debt 0.0 0.2 0.2 0.1 0.1 0.1
Commercial Loans/Credits 0.1 0.2 - - - -
Local Currency Bond (PIBs) 0.0 - 0.0 0.0 - 0.0
Saudi Fund for Development (SFD) - - 0.2 0.2 0.2 0.2
SAFE China Deposits - 0.5 0.5 0.5 1.0 1.0
NBP/BOC Deposits 0.4 0.3 0.2 0.1 - -
B. Short Term (<1 year) 0.7 0.7 0.9 0.6 0.5 0.0
Commercial Loans/Credits
IDB 0.7 0.7 0.8 0.6 0.5 -
Local Currency Securities (T-Bills) 0.0 - 0.1 0.0 0.0 0.0
ii) Publicly Guaranteed Debt 0.2 0.2 0.2 0.1 0.2 0.9
A. Medium and Long Term(>1 year) 0.2 0.2 0.2 0.1 0.2 0.9
Paris Club - - - - - -
Multilateral 0.1 0.1 0.1 0.0 0.0 0.3
Other Bilateral 0.1 0.1 0.0 0.0 0.2 0.6
Commercial Loans/Credits 0.0 - 0.1 - - -
Saindak Bonds - - - - - -
B. Short Term (<1 year) - - - - - -
IDB - - - - -
1.9 2.4 3.8 4.4 3.6 3.1
1.0 0.9 1.4 1.3 1.3 1.2
4. IMF 1.3 5.1 8.1 8.9 7.3 4.4
of which Central Govt. - - 1.1 2.0 1.9 1.7
Monetary Authorities 1.3 5.1 7.0 6.9 5.4 2.7
- - 0.7 1.1 1.8 1.6
Borrowing - - 0.2 0.4 0.9 0.7
Nonresident Deposits (LCY & FCY) - - 0.6 0.7 1.0 0.8
- - 1.9 1.6 2.7 2.8
Total External Debt (1 through 6) 44.9 51.1 59.0 63.8 63.1 57.5
1.3 1.3 2.6 2.6 2.4 2.3
SBP Deposits 1.2 1.2 1.1 1.0 0.9 0.8
SDR Allocation - - 1.5 1.6 1.5 1.5
Others 0.1 0.1 0.0 0.0 0.0 0.0
Total External Debt & Liabilities (1 through 7) 46.2 52.3 61.6 66.4 65.5 59.8
(of which) Public Debt 40.7 46.4 49.8 54.5 53.1 48.7
Official Liquid Reserves 8.6 9.1 13.0 14.8 10.9 6.0
P: Provisional
Source: State Bank of Pakistan, Economic Affairs Division and Debt Policy Coordination Office Staff Calculations
(US$ in billion)
5. Banks
7. Foreign Exchange Liabilities
2. Private Sector Debt
6. Debt liabilities to direct investors - Intercompany debt
3. Public Sector Enterprises (PSEs) Debt
(2008-2013)
