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Pakistan’s debt, liabilities grows to record Rs31 trillion, SBP says rapid rise in debt burden in coming months due to currency depreciation and interest rate hike

Pakistan facing a $12bn external financing gap, forex decreased by $242m, asad Umar hints mini budget in offing, Islamabad shares IMF conditions and pressure to China

Nation special report

ISLAMABAD: The International Moneytary Fund has demanded Pakistan to impose new taxes worth of Rs. 160 billion at a time when country’s debt and liabilities rose to nearly Rs31 trillion at the end of September 2018 with an addition of Rs 984 billion in just three months. According to the statistics issued by the State Bank of Pakistan (SBP) showed that the increase comes amid concerns over a rapid rise in the debt burden in coming months owing to currency depreciation and interest rate hike.

The statistics revealed that by the end of first quarter of the current fiscal year, the country’s total debt and liabilities soared to Rs30.9 trillion. Within a span of just three months, there was an increase of Rs984 billion, or 3.3%, in the overall debt.

Of the Rs30.9 trillion, the gross public debt, which is the direct responsibility of the government, stood at Rs25.8 trillion.

There was an increase of Rs839 billion in the gross public debt in three months, which was far higher than the overall budget deficit of Rs542 billion for the period. One of the key reasons behind the higher debt was the increase in interest rate and devaluation of the rupee during July-September 2018.

PRIME MINISTER IMRAN KHAN CHAIRS MEETING OF THE FEDERAL CABINET AT PM OFFICE ISLAMABAD ON DECEMBER 20, 2018.

A single rupee devaluation adds Rs97 billion to the public debt. Similarly, a 1% increase in interest rate increases the cost of debt servicing by roughly Rs180 billion. This ultimately increases borrowing requirements of the finance ministry.

Further, the total debt and liabilities also include the public sector enterprises’ (PSEs) debt, non-governmental external debt and inter-company external debt from direct investors abroad. Excluding liabilities, the country’s total debt swelled to Rs29.4 trillion.

The government’s domestic debt surged to Rs 16.9 trillion with an addition of Rs507 billion in first three months of the current fiscal year. The government’s external debt increased to a record Rs8.1 trillion by the end of September, a net addition of Rs327 billion in three months. The total external debt and liabilities surged to Rs12 trillion on the back of currency devaluation. The non-government external debt has also crossed Rs2 trillion.

Moreover, total liabilities, which are indirectly the responsibility of the finance ministry, slightly decreased to Rs1.42 trillion by the end of September. Domestic liabilities dropped from Rs820 billion to Rs809 billion.

External liabilities decreased from Rs622 billion to Rs620 in the three months. Owing to a massive increase in the debt stock, the country’s interest payments have increased significantly. The devaluation of the currency has also significantly increased the cost of external debt servicing.

IMF demands hikes

It is learnt that the International Monetary Fund Fund has asked Pakistan for Rs160 billion worth of new tax measures in the current fiscal year, which ends in June 2019, in order to stabilise the fiscal framework.

The Federal Board of Revenue (FBR) calculates that the 1.1 per cent increase alone means Rs400-500bn additional tax revenue measures. If undertaken, the steps will lift the country’s tax-to-GDP ratio to 13.9pc by end June 2021. The government has set a fiscal deficit target of 5.6pc for 2018-19 whereas the IMF’s projection is slightly below this.

The emphasis on a revenue target is a departure from standard practice for IMF. Previous Fund programmes were built around a fiscal deficit target, and it was left to the government to decide how it was going to be achieved — through some combination of revenue increases and expenditure cuts.

This time IMF is laying out specific revenue targets for each year of the proposed programme and is asking the government to commit to raising the tax-to-GDP ratio by 0.4pc of GDP by June 2019, followed by 1.1pc in FY20 and 1.2pc in FY21.

Second Saudi tranche

The State Bank of Pakistan (SBP) confirmed on Friday that it had received another tranche of $1 billion from Saudi Arabia as part of the package promised by Riyadh to support Islamabad’s balance of payments.

“Yes, we received $1 billion from Saudi Arabia today,” Abid Qamar, SBP spokesman, confirmed to Arab News.

According to the central bank, Pakistan’s foreign exchange reserves during the week ending Dec. 7, 2018, decreased by $242 million to $7,260.4 million because of external debt servicing and other official payments.

With the inflow of the second tranche of $1 billion, the reserves have increased to approximately $8 billion. “The exact figure cannot be ascertained at this point because of constant inflows, outflows, and other payments,” Qamar noted.

Facing a $12 billion external financing gap, Pakistan secured a $6 billion package from Saudi Arabia: $3 billion in foreign currency support and $3 billion worth of oil on deferred payments. The details were worked out during the visit of Prime Minister Imran Khan in October 2018.

The bailout package consists of $3 billion in cash deposits and another $3 billion for oil imports on deferred payments for one year.

As for the final tranche of $1 billion, the SCB spokesman said: “The third tranche is expected in January 2019.” Pakistan received the first tranche of $1 billion from the Kingdom on Nov. 19, 2018.