ISLAMABAD, March 4: The Ministry of Finance plans to limit direct borrowing from the central bank and rely more on the market in a bid to lighten the burden of public debt on the government.

Since direct borrowing from the central bank dampens efficacy of the monetary policy and fuels inflation, the plan is to reduce the government’s stock of Market-Related Treasury Bills (MRTBs) at a measured pace by issuing Pakistan Investment Bonds (PIBs).“As a policy, the government will limit its direct borrowing from State Bank of Pakistan (SBP) and instead borrow from the market,” says a debt policy statement of the ministry, finalised on Jan 31.

It concedes that the government has not successfully met the condition of the Fiscal Responsibility Debt Limitation Act 2005 in 2006-07 to cut its debt.

The Act says “in every financial year, beginning from the first July, 2003, and ending on June, 13, 2013, there must be reduction of total public debt by not less than 2.5 per cent of the estimated gross domestic product for any given year.

The domestic debt stood at 57.2 per cent of the GDP by the end of June 2006 and decreased to 55.2 per cent of the GDP by the end June 2007 which implies a 2.0 percentage point reduction in the public-to-GDP ratio against specified 2.5 percentage points. According to the report, at the end of 2006-07, total domestic debt reached Rs2,610.2 billion. The net increase in domestic debt was to the tune of Rs298.6 billion from the end of 2005-06 when domestic debt was Rs2,311.6 billion.

This represents a growth rate of 12.9 per cent which is higher than the average rate since 2000 when it was 6.6 per cent, but still lower than the pace of growth of the domestic debt observed in 1980 and 1990 which were 20 and 16 per cent, respectively.The increase in the domestic debt during 2006-07 in absolute terms was primarily from the rise in stock of floating debt. However, two other components of the domestic debt “permanent” and “unfunded debt” contributed to increase in the stock of domestic debt as well, the report said.

There was a net increase in the stock of permanent debt by Rs47.7 billion. Floating debt increased by a staggering Rs167.4 billion while unfunded debt saw an increase of Rs83.5 billion. This substantial increase in floating debt was the result of government’s decision to rely less on long-term PIBs and more on direct lending from the central banks which is in the form of MRTBs.

“This increase in the share of floating debt has shortened the maturity profile of domestic debt and increased the vulnerability to rollover risk.”

The domestic debt is classified in three categories: permanent debt, floating debt and unfunded debt.

Permanent debt includes medium-and-long-term debt, such as PIBs and prize bonds, while floating debt consists of short-term borrowing in the form of T-bills.

Unfunded debt refers mostly to outstanding balance of various national saving schemes.

At the end of last financial year, the permanent debt represented 21.6 per cent of total domestic debt while floating debt made up 42.4 per cent. The remaining 36.0 per cent consisted of unfunded debt.

External debt and liabilities (EDL) at the end of 2006-07, according to the finance ministry, were $40.17 billion.

This shows an increase of $2.93 billion which represents a 7.8 per cent increase over the stock at the end of 2005-06.

A majority of the EDLs are in the form of medium-and-long term borrowing from multilateral and bilateral lenders which accounts for more than 80 per cent of outstanding debt.

The first quarter of 2007-08, the ministry of finance concedes, saw an increase of EDLs by 3.7 per cent to $41.67 billion. Public and publicly guaranteed debt increased by $1.5 billion (4.2 per cent) mainly on account of borrowing from multilateral lenders while the external liabilities continued on their downward trend, declining by $130 million (8.8 per cent).

The total disbursement of official loans during 2006-07 was $2.67 billion. Of which multilateral debt accounted for $2.4 billion while bilateral loans accounted for $208 million.

The foreign loans disbursement by purpose is as follows: $1.72 billion for balance of payment (BOP)/Cash support, $130 million for earthquake relief and for power of $110 million.

Pakistan kept its policy of resorting more to concessional and longer term inflows which has positive impact to improve the maturity profile of external debt.

Nearly $3.25 billion of new official loans were signed during the last financial year.

Nearly 75.4 per cent of new loans signed were BOP/Cash which is clear manifestation of rising current account deficit and unprecedented rise in petroleum bill.

The government plans to put in place several measures to meet its twin objectives of borrowing at the minimum cost while keeping risks in checks and of developing an efficient local current and sovereign debt market.

The Debt Policy Coordination Office (DEPC) of the Ministry of Finance will establish links with the four management units (SBP, Budget Wing, Economic Affairs Division (EAD) and National Saving Schemes (NSS) to develop an updated electronic data of all components of debt on a historical basis.