KARACHI, April 15: Record interest payments on the domestic debt in the first half of the current fiscal year eroded the debt sustainability of the country, the State Bank of Pakistan observed in its latest quarterly report for this fiscal year.

The interest payments on domestic debt witnessed a significant 42.4 per cent year-on-year increase in July-December period of 2012-13.

The interest payments on domestic debt were in line with the growth in the debt. The interest payments on local debt were rose by 60 per cent during the first quarter (July-September) of the current fiscal year. The same grew by not more than 14 per cent last year.

“The net amount the government raised in the T-bill auctions during the first quarter of this fiscal was 64.8 per cent higher than the net amount raised in all of FY12,” said the report.

The report revealed that the eagerness of commercial banks to invest in longer term T-bills also allowed the government to retire its debt to the central bank. With this focus on shifting the debt away from SBP, the primary auction targets were set at fairly high levels during the first quarter.

The SBP said that expecting further cuts in the policy rate, banks preferred longer-term securities, and the government set PIB auction targets at historically high levels during the first quarter.

The total amount accepted by the government in PIB auctions during the quarter was 59 per cent of the entire amount raised during FY12.

In addition, the government also raised Rs47 billion through Ijara Sukuk bonds during this period.

“The data shows that the domestic debt created during the first quarter of FY13, was greater than the federal government’s financing requirements for the period,” said the report.

In 2nd quarter the government opted to finance part of its needs by drawing down its bank deposits, which reduced the need for fresh borrowing.

The report further said the net inflows into NSS remained strong as in April 2012, the government allowed some institutional investors to participate in these schemes; and rates of return on NSS were increased in April and July 2012, which spilled-over into FY13.

In April 2012, the government allowed institutional investment comprising of individual funds (such as pension, gratuity, superannuation, contributory provident funds and trusts etc) in NSS.

“Federal tax revenues which is a determinant of the domestic debt servicing capacity, could not keep pace with the rising interest payments during first half of FY13, indicating an erosion in the debt sustainability of the country,” said the SBP report.