Source: Pakistan Government Data
The government of Pakistan only recognizes the debt issued by its own Debt Office as part of the country’s national debt. This excludes debt accumulated by the provinces and territories of the country or local government. Debts accumulated by public sector agencies and service providers, such as the railways system, the port authorities, or the water supply system are also not included unless they are directly financed by the federal government.
The table below explains what is included in the national debt figure and what isn’t:
|Pakistani Government Obligation||Government Department||Included in National Debt?|
|Government-issued bonds||Ministry of Finance Debt Office||Yes|
|Short-term debt instruments||Ministry of Finance Debt Office||Yes|
|Provincial and government debt||None||No|
|Debts of public agencies||None||No|
|Debts of state-owned enterprises||None||No|
|Civil Service pension obligations||All||No|
|Provincial pension obligations||None||No|
|National bank guarantee scheme||Ministry of Finance||No|
|Accounts Payable (unpaid bills)||All||No|
By definition, Pakistan’s national debt is only managed by the central government’s Ministry of Finance.The full name of that government department is the Ministry of Finance, Revenue, and Economic Affairs.
By the Department of Finance’s own admission, the government came close to defaulting on its debt in 2013. As a result of these difficulties, the central government has found it difficult to attract buyers for its bonds and has turned to bank loans, IMF assistance, and intergovernmental loans in order to raise debt.
The central bank is able to raise funds in the market and the government has relied on this debt channel from the State Bank of Pakistan for the past couple of years. The government also relies on short-term debt instruments to finance project that should ordinarily be funded through long-term bonds.
All bonds and bills are sold through an auction process. These auctions are held periodically by the State Bank of Pakistan, which uses the sales to raise funds on behalf of the government and in the government’s name.
The government of Pakistan offers two horizons of debt instruments:
The government has not been able to place large-scale bond offerings since 2007. Since 2013, the propensity of the central bank to keep increasing interest rates deters commercial banks and investment funds from purchasing government bonds. This is because they figure that they would get a better interest rate out of the government by waiting.
The different sources of funds that the Pakistani government exploits for long-term debt in order of importance are:
In 2018, the full amount that the government was able to raise through bond issues was Rs15 billion. That amounts to $1.2 billion dollars and was issued as five-year Pakistan Investment Bonds at an interest rate of 9.25%.
The Pakistani Investment Bond is the traditional investment bond, which endures for a stated period and pays a stated interest rate annually.
US Special Dollar Bonds are the same as a standard bond, except that they are denominated in US Dollars instead of in Pakistani Rupees.
Sukuk is a Sharia-compliant investment device, which is in the form of a share in a basket of investments. The security for the loan is treated as being co-owned for the duration of the loan. The government then buys out investors at the termination of the Sukuk period. The government raised $1 billion in 2016 with a 5-year Sukuk agreement that pays an annual interest rate of 5.5%.
The government is heavily reliant on Market Treasury Bills as a source of funding. These notes are intended to cover cash-flow problems, and as a short-term financing instrument, never have maturity dates of more than a year. Market Treasury Bills are issued with maturities of three months, six months, and one year.
As Treasury notes are zero coupon discounted devices, the government has to sell more and more each year if it just wants to service the debt and cover the repayments of expiring bills. Short-term debt represents 54.2% of the national debt.
The government of Pakistan runs a national savings scheme. This is in the form of fixed-term deposits made by members of the public or corporations. The deposits are recorded with the issue of a bond and each bond pays interest. However, these bonds are not included in the national debt figures of the country because in the case of holding savings, the government is acting as a guardian of other people’s money rather than as a borrower.
Water and Power Development Authority issues bonds, which are known as WAPDA bonds. Although WAPA is a public institution, the government does not count these bonds as part of the national debt.
Pakistan’s major problem is not the debt issue, but its constant shortage of foreign currency. The country runs a trade deficit, which results in a greater demand for foreign currencies in the Pakistan economy than the central bank can supply. When the government takes out loans from abroad, it increases the country’s foreign reserves.
In 2014, the World bank gave Pakistan a $12 billion loan, which was scheduled to be dispersed over five years. The loan carried an annual interest rate of 2% and does not have to be repaid for 30 years. This is a very favorable loan agreement for the country and costs a lot less to service than the government’s on bonds, which are difficult to sell at a rate of 9.25%.
The Pakistan government has needed to turn to other governments to help it supply sufficient foreign currency to keep the economy going. In addition to the World Bank loan, the Pakistani government received a $6.7 billion loan from the IMF in 2014. The government also received a $1.5 billion gift from the Kingdom of Saudi Arabia in 2014.
Since 2014, the government of Pakistan has been able to source loans from the government of Japan, which became the country’s largest creditor. That was until the government signed a deal with the government of China, which began providing Chinese government loans to Pakistan in 2016.
The China-Pakistan Economic Pipeline agreement provides loans to the government of Pakistan, which are included in the national debt. It also provides debt swaps between the Pakistan-based branches of state-owned Chinese banks and the State Bank of Pakistan. Those debt financing measures, together with a foreign currency line of credit offered by the government of China through its banks do not contribute to the country’s national debt figure.
What facts should you know about Pakistan’s national debt?