Table VII.1
Profile of Domestic and External Debt
(Rs billion)

Source: i) SBP, ii) MOF
* Based on Table VI1.6;
**Based on Table VII. 10.
***Foreign exchange earnings include inflows under the trade and service account, along with private transfers. This primarily comprises export receipts, shipment earnings, transportation charges, investment income, home remittances, inflows into resident FCAs, and kerb purchases.
Figures in parentheses are shares in total debt or total interest payments.

Domestic debt is divided into three categories: permanent debt, floating debt, and unfunded debt.

Permanent debt represents government borrowing using instruments of greater than one-year maturity. Floating debt is short-term borrowing (up to one year) primarily at market rates. Unfunded debt refers to mobilization from NSS instruments that are encashable on demand.

As shown in Figure VII.1, the share of permanent debt has fallen consistently, with a corresponding shift towards unfunded debt. Market priced floating debt has not shown any perceptible trend since FY95, but still continues to hold a dominant position in Pakistan’s domestic debt. This changing profile is hardly a welcome development, which explains the priority given to debt management by this government.

In terms of the broad categories of domestic debt, Table 7.5 (Statistical Annexure) presents the stocks since FY97.

Permanent Debt
Market loans: To meet financing requirements, the government used to invite applications for subscriptions by indicating the amount of credit required, and the cost they would be willing to pay. As the federal government has stopped this practice since FY92, and provincial governments since FY98, with on-going maturities and no new additions, the outstanding balance has come down.

SLIC bonds: In the early 1980s, the government borrowed from State Life Insurance Corporation (SLIC) using special 15-year bullet bonds. The first and second payments were made in FY96 and FY97, but payment pressures forced the government to issue new five-year bonds to cover these payments since the last three fiscal years. This explains the marginal increase in the outstanding stock since FY98.

FIBs: Since no new sale of FIBs has taken place since June 1998, the outstanding stock has fallen.

Prize Bonds: The outstanding stock of Prize Bonds fell by Rs 32 million during FY00, which is in sharp contrast to an average increase of nearly Rs 10 billion over the last three years. This is primarily attributable to the discontinuation of the old Prize Bond scheme that carried an effective average return of 12 percent, while the new scheme pays an average return of 6 percent; these are expected returns, which account for the number of prizes, the amounts, and the number of eligible bonds that can win.

Floating Debt (Market Treasury Bills)
Indicating the compositional change in government borrowing from the banking system, the stock of MTBs held by scheduled banks fell to Rs 90.0 billion in FY00, from Rs 141.8 billion in FY99; while SBP’s holding of MTBs increased by Rs 137.6 billion to Rs 467.3 billion at the end of FY00 (see Table 7.5 in Statistical Annexure). This compositional shift is discussed in more detail in Chapter V.

Adhoc treasury bills are only issued under special circumstances. Although no interest is charged, these usually carry a service charge of 0.5 percent per annum. The Rs 28.5 billion increase in adhoc treasury bills in FY99 was on account of SBP’s anticipated exchange loss following the unification of the exchange rate in May 1999.

Unfunded debt (National Saving Schemes)
As seen in Table 7.5 (Statistical Annexure) and Figure VII.1, despite the overall increase in Pakistan’s domestic debt, the share of the unfunded component increased consistently over the last five fiscal years. Comprising 27.7 percent of total domestic debt in FY95, this has increased to 41.8 percent in FY00, indicating a near tripling in Rupee terms in six years. Given the attractive returns on NSS instruments coupled with the government’s inability to control the actual amount of such borrowing (as these instruments are available on tap to the general public), unfunded debt has become the single largest category in Pakistan’s domestic debt. The three consecutive rate cuts since May 1999, were much-needed steps towards more effective management of Pakistan’s domestic debt. During FY99, GOP retired Rs 84.1 billion to the scheduled banks, while T-bill rates fell from 15.6 percent to 10.6 percent during the course of the year. However, during this period, the government continued borrowing in net terms through NSS instruments (Rs 130.6 billion ) at rates above 14.0.

Of the three most popular instruments offered by the Central Directorate of National Savings (CDNS), the most popular is the Defense Savings Certificate (DSC). A bullet-bond of 10-year maturity, the outstanding stock of debt on account of this instrument alone is Rs 247.8 billion as of end-FY00. This is followed by Rs 202.3 billion from Special Saving Certificates (SSC) and Accounts, and Rs 170.1 billion from Regular Income Certificates (RIC). The total mobilization from just these three instruments is 39.7 percent of domestic debt outstanding.

Taking note of the high inflows into NSS because of the sharp increase in real returns, the government reduced rates in May 1999, and also imposed penalties on early encashment on RIC. It also banned institutional investment in all NSS instruments from April 2000. The new yields, before and after these cuts are shown in Figure VII.2. The impact of these changes on net mobilization is shown in Table VII.2 and Figure VII.3.

As a result of the rate cuts, net mobilization by the three largest instruments (DSC, SSC and RIC) fell from Rs 123.4 billion in FY99 to Rs 84.8 billion in FY00. Following penalties on early encashment of RIC on 14th May 1999, and the lower returns, net mobilization by this instrument has been the worst hit. As can be seen from Table VII.2, net inflows fell sharply in June 1999, and have not been able to show stable inflows during FY00. This is also clear from the fact that net additions to stock were Rs 25.9 billion in FY00 compared with Rs 59.1 billion in FY99. With the rate cuts, investment in SSC has been impacted more than DSC.

Table VII.2
Net Mobilization by NSS
(Rs million)