KARACHI: Pakistan government has been actively trying to bridge the gap in twin deficits where much has been said, written and acted upon to tame external imbalances, however the fiscal side of the equation remains largely unaddressed.
Rising interest rates on domestic debt servicing remain the largest head by share in expenditures (28 percent in FY18), which analysts believe cannot be altered in a short period of time and remains a function of structural policies and debt policy framework.
In recent times, the debt mix has tilted towards short term floating debt (T-bills) from permanent debt (Pakistan Investment Bonds, PIBs) – the former’s share increased by 10ppt to 54 percent at the end of FY18 and the latter’s share fell by roughly equivalent quantum to 28 percent.
“This has been attributable to lower appetite of financial institutions for the long term securities due to expectations of monetary tightening,” Sharoon Ahmed said in a report issued by Elixir Securities.
This imbalance is expected to result in a swift increase in domestic debt servicing which is expected to jump 25.0/17.5 percent YoY in FY19/FY20 to Rs1.65 trillion/Rs1.94 trillion (4.3/4.4 percent of GDP and 31.6/35.6 percent of revenues) from Rs1.32 trillion (3.8 percent of GDP and 28.2 percent of Revenues) in FY18.
“As such, our projections for FY19/FY20 domestic debt servicing are estimated to be 19/31 percent (Rs262 billion/Rs456 billion) higher than budgeted Rs1.49 trillion/Rs1.68 trillion,” Ahmed added.
Elixir Research estimates that every 1.0 percent increase in interest rate to raise annual domestic debt servicing by Rs133 billion (or 6.8 percent). The overall jump is moderated by lower sensitivity of PIBs’ debt servicing of Rs11 billion (or 2.3 percent) due to nature of cash accounting where coupon rates remain fixed and interest cost is calculated based on coupons paid out (inclusive of difference in face value and initial value at maturity arising due to difference in coupon rate and yield) rather than amortization of debt.
As far as floating PIBs are concerned their share is insignificant at the moment, however they will likely increase in popularity and as such its debt servicing cost is estimated to change by Rs0.2 billion (or 9.1 percent).
Ijara Sukuks’ share is also low in overall debt and in spite of fixed rental rates, their sensitivity is higher Rs3.0 billion (9.8 percent) due to shorter maturity of three years and complete refinancing at higher rates at relatively faster pace.
While the incumbent government presented supplementary budget to partially bridge the fiscal shortfall, analysts believe that measures including Rs225 billion of development expenditure cut and revenue mobilization to increase tax collection through tax net expansion would remain insufficient.
“In short term, there is not much that can be done in curtailing expenditures other than withdrawing energy subsidies, and taking revenue measures of imposing or increasing indirect taxes/surcharges – in the past we have seen ad-hoc imposition of such taxes under the guise of IDP Tax, Flood Surcharge, GIDC, Supertax, Tariff Rationalization Surcharge, Financing Cost Surcharge, Neelum-Jhelum Surcharge etc. Out of these, IDP tax, Flood surcharge and GIDC were imposed to bridge shortfall in revenues after availing IMF Stand By Arrangement (SBA) loan facility in 2009-11 and Supertax was imposed after availing IMF Extended Fund Facility (EFF) in 2015. Similarly, General Sales Tax (GST) was last increased from 16 percent to 17 percent in 2014 (post Pakistan’s entry in IMF Program in 2013)”.
Over a longer term however, the economic managers will have to increase revenue mobilization by bringing agriculture and services sectors under the tax net and implement measures to curtail tax evasion.