• Plans to meet most of medium-term needs through 10- to 15-year bonds, concessional multilateral loans
• Aims to diversify local debt instruments to inflation-linked bonds, list government papers on stock exchange

ISLAMABAD: With the International Monetary Fund (IMF) now on board, the government considers meeting most of its external financing needs in the medium term through 10- to 15-year international bonds and concessional multilateral loans.

It also plans to diversify local debt instruments to inflation-based bonds, list government papers on the stock exchange, and issue short-term Islamic and conventional floating rate products.

This is part of the new Medium-Term Debt Management Strategy, released by the Ministry of Finance on the weekend, for the fiscal years 2023 to 2026.

“Availing maximum concessional external financing from bilateral and multilateral development partners” is one of the measures under the strategy to increase the average time to maturity of external debt portfolio over the medium term, it said, adding that other measures would include “borrowing more in 10 years’ and 15 years’ tenors in the international capital market while keeping the consideration for cost and risk trade-offs”.

Multilateral loans provide maximum flexibility to the borrower in the choice of a grace period, final maturity and amortisation structure. In such cases, the government will prefer to choose a relatively higher average time to maturity while ensuring a smooth redemption profile of its external public debt portfolio.

At the same time, the government would maximise efforts for contracting fresh commercial loans in relatively higher tenors (three years or more) compared to existing rollover tenures of no more than a year.

In addition, efforts would be geared towards reprofiling existing stock of commercial loans from the short term to medium and long terms.

Under the strategy, the domestic market will remain the main source of funding to finance the fiscal deficit and refinance existing domestic debt, for which the government is planning to introduce multiple instruments to broaden the investor base and offer diversified investment avenues to investors which are closer to their investment horizons, income preferences and risk appetite.

For this, the government was also exploring the option of introducing inflation-linked bonds to attract insurance companies, pension funds and mutual funds that prefer to buy these instruments for their liability management.

The government is also considering listing and trading government securities through the stock exchange to support investor outreach.

Also on the plate is the option of asset-light structures based on Ijara, Murabaha or any other Sharia-compliant mode to raise funds, as assets available with the government are limited.

“The government may also consider undertaking bond exchanges and buyback operations to manage rollover and refinancing risk by consolidating a large number of outstanding securities into fewer and more liquid instruments,” the ministry said in the strategy paper.

Savings certificates in digital form

Moreover, the National Savings Scheme (NSS) certificates will be available for purchase in digital form through the Central Depository Company (CDC).

Within the non-banking sector, most of the incremental proceeds are expected to be mobilised through NSS. In this regard, the government would gear up efforts towards increasing retail investor participation in government securities in both primary and secondary markets.

“The ultimate aim is to utilise the stock exchanges for primary market/auction of the government debt securities to enable wider outreach and improve participation of retail segment,” it said.

Talking about the strategy to increase multilateral funding, the Ministry of Finance said that because of renewed efforts to speed up the pace of project implementation, disbursements under project aid would increase over the medium term.

On the other hand, since policy-based funding is linked to macroeconomic stability, it expected the structural reforms initiated by the government to increase macroeconomic stability.

“With improved macroeconomic indicators coupled with faster project implementation, disbursement from multilateral and bilateral creditors is expected to increase in the medium term,” it said.

The ministry said macroeconomic projections indicated a declining trajectory of the public debt-to-GDP ratio over the medium term, which had increased over the past few years.

The average time to maturity of external debt has decreased over the past few years from 10 years in 2012-13 to seven years in 2018-19, and further down to 6.2 years by the end of June 2022.

This is primarily because of the running-off of the existing portfolio and due to the fact that the government had to partially meet its growing external financing requirements from commercial avenues. “Commercial borrowing is contracted at market terms, i.e. at a relatively higher cost and lower tenor,” it said in the paper.

The risks, however, remained on the higher side although the medium-term fiscal framework 2023-26 mainly focused on recovery from the economic and fiscal impact of the catastrophic floods, post-Covid scenario, Russia-Ukraine conflict, and global inflationary pressure through a sustainable fiscal policy over the medium term.

This is based on the premise that the government would reduce the budget deficit from 7.9pc of GDP in 2021-22 to 3.1pc by 2025-26, with average annual inflation steeply falling to around 6.5pc by 2025-26 on the back of improved commodity-producing sectors (agriculture and industry), effective monetary policy, and stronger fiscal discipline.

“With increased investor confidence, stable inflation, fairly valued exchange rate, improved current account balance and better fiscal and monetary management, economic growth is projected to reach 5.5pc per annum by FY26,” the paper said.

Over the medium term, a reduction in inflation is expected to result in lower borrowing costs for the government. However, lower tax revenues may lead to greater fiscal deficits to be funded through higher borrowings and thus reduce fiscal space for development and social sectors.

Also, the government is targeting higher growth in the Federal Board of Revenue’s collection and any shortfall will have adverse consequences for the government’s projected fiscal position. The impact arising from climate change events may also adversely affect the macroeconomic framework.

Published in Dawn, July 3rd, 2023