During the first half of the fiscal year, the finance ministry’s semi-annual debt bulletin, Pakistan’s key debt sustainability indicators have experienced a significant decline due to sharp currency devaluation and rising interest rates.
As a result, between July and December 2022, the proportion of external public debt increased, while the average maturity time and the period for resetting interest rates decreased.
Historically high-interest rates and a 56% currency devaluation since the current government took office a year ago have contributed to these changes. The share of external debt in total public debt increased from 37% in June to 37.2% in December, raising currency risks as the rupee weakens and foreign countries become more reluctant to provide loans.
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The report warns that large external payments combined with low foreign exchange reserves could create liquidity issues and destabilize the exchange rate, subsequently increasing the burden of external loans in local currency terms. Despite the government’s reluctance to restructure debt, worsening indicators and insufficient foreign funding may soon force Pakistan to take this route.
By December, Pakistan’s total public debt was $233 billion, with $86.6 billion in external public debt. The country must service 28% of its debt within a year, exposing it to various debt-related risks. Floating rate domestic debt has now reached Rs22.5 trillion, or 68% of domestic debt, which is dangerous due to record 20% interest rates.
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Public debt in rupee terms increased to Rs52.7 trillion during the first half of the fiscal year, adding Rs3.6 trillion. Depreciation of the rupee added Rs2.3 trillion to public debt in six months, accounting for a 63% increase in debt during this period. Interest expenses totaled Rs2.27 trillion in the first half of the fiscal year, equivalent to 72% of the public debt increase.
The finance ministry emphasizes the importance of limiting exposure to external debt to manage exchange rate risk. However, the report also reveals that the average maturity time of domestic loans decreased from four to three and a half years within a year, increasing the country’s reliance on commercial banks and raising the potential for exploitation.
The average maturity time of external debt it decreased from six years and seven months to six and three months, falling below the minimum threshold and exposing the country to refinancing risks from foreign creditors.
Finance Minister Ishaq Dar’s recent statement about learning to live with or without the IMF has raised questions about the government’s intentions to revive the derailed $6.5 billion bailout package.
