Debt indicators remain well within sustainability thresholds

The spokesman of the Ministry of Finance while referring to a report carried by a section of media on December 03, 2017 titled “Debt sustainability indicators head to dangerous threshold”, said here Monday that the report has used exaggerated statements and drawn baseless conclusions.

The Spokesman went on to say: First of all it is to be noted that Medium Term Debt Management Strategy (MTDS) is a strategy to be implemented over the medium term i.e. three to five years. The second MTDS published in February 2016 was a continuation of the previous MTDS published in April 2014. While it incorporates the new economic realities such as new market conditions and the overall economic cycle yet it focuses on the same principles as laid out in the first MTDS. To reiterate, the guiding principle was lengthening of the maturity profile of domestic debt while making appropriate tradeoffs between the cost and risks. Resultantly, debt cost and risks indicators have significantly improved when compared with fiscal year 2013and are on track to remain within the ranges set under MTDS. Thus, evaluating the debt risk indicators in isolation over the short term i.e. one year or less is meaningless as it totally ignores the medium term perspective embedded in the strategy as well as the element of cost savings.

The limited understanding of the writer can be gauged from the facts that the writer is unable to interpret the debt risk indicators and accordingly presented incorrect numbers and drew baseless conclusion at various instances based on his flawed understanding. Although there are many factual errors in the news report, however, following few cases are enough to prove the point:

The news report stated that “the domestic debt’s average time-to-maturity also reduced by three months to one year and eight months by the end of the last fiscal year. The results show that the government has deviated from the path of prudent debt management”. This statement is totally baseless as neither the numbers nor the conclusion is correct. The writer used the average time to maturity number of 2013 and deliberately stated it as 2017 number. Since the number is incorrect, the conclusion drawn based on this number is also incorrect. The fact is that average time to maturity of domestic debt increased from 1.8 years in 2013 to 2 years in 2017;

The writer claims that the foreign currency debt as a percentage of the total debt slightly decreased from 28.6 percent to 28.4 percent by June 2017 as the government had changed the public debt definition, excluding publically-guaranteed debt from its public debt. This statement is blatantly incorrect as debt risk reports has been prepared on similar parameters as before.

It is important to note that MTDS emphasizes tradeoff between cost and risk indicators. Therefore, there remains need to evaluate both cost and risk indicators in conjunction rather in isolation. It has been clarified time and again that evaluating debt statistics in isolation is prone to “Anchoring Bias” wherein underlined economic realities are ignored in favor of narrative bias. In this regard, following facts are worth noting: The average cost of total gross public debt was reduced by over 150 basis points during past couple of years owing to smooth execution of the MTDS and yet the indicators have witnessed improvement over the medium term; Encouragingly, the medium to long term domestic debt portfolio increased from PKR 1.78 trillion to almost PKR 4.80 trillion or by around 2.7 times during last four years in-line with objectives of Medium Term Debt Management Strategy of Pakistan. Had the government not mobilized these medium to long term domestic inflows, the impact on debt risk indicators would have been much greater; Even if writer myopic approach is considered, the domestic debt maturing within one year has increased by around 3.7 percentage point during 2016-17 while in one of his publication the writer himself acknowledged the fact that domestic debt bond portfolio cost reduced by around 500bps during past few years through re-profiling. Accordingly, Government interest expenditure as percentage of revenue was reduced to 27 percent of total revenue during 2016-17 as compared with 33 percent during 2012-13. Just to illustrate the matter the interest cost over the last two years has remained broadly constant despite increase in the absolute quantum of public debt. It is evident that benefit on account of cost savings clearly overweigh the slight increase in refinancing risk in current year whereas if the medium term perspective is taken into account than not only the indicators have improved tremendously as compared to 2013, but the cost has also been reduced significantly, a win-win situation.

The news article has used abstract phrases implying that Pakistan’s debt sustainability indicators have worsened by misquoting an official debt risk report. In fact, the said report shows that all risk indicators are well within the defined ranges as envisaged in MTDS (2015/16 – 2018/19). This statement like other such phrases used in the article, shows writer’s lack of comprehension regarding MTDS and its parameters which is not supported by the successive risk reports when evaluated in a four-year time series available on Ministry of Finance website. Most importantly, debt sustainability ranges as specified in MTDS (2015/16 – 2018/19) were defined in consultation with various external as well as domestic stakeholders after taking into consideration various pertinent factors. If all indicators are well within defined sustainability ranges as also acknowledged by the news report, it is surprising to note that the same news report is presenting conflicting statements that debt sustainability is heading to dangerous threshold; The writer selectively compares debt risk indicators at end June, 2017 with fiscal year 2013 and tries to highlight the negative developments while deliberately ignoring the improvements witnessed in debt risk indicators during last four years, a fact that is acknowledged by global stakeholders: “Refinancing Risk of the Domestic Debt Portfolio” was reduced from 64.2percent in 2013 to 55.6 percent in 2017; “Exposure to Interest Rate Risk” was also reduced, as the percentage of debt re-fixing in one year decreased to 47.8 percent in 2017 compared to 52.4 percent in 2013; “Share of External Loans Maturing within One Year” was equal to around 27.7 percent of official liquid reserves in 2017 as compared with around 68.5 percent indicating improvement in foreign exchange stability and repayment capacity.

The writer also claims average time to maturity of external debt decreased as a result of government’s decision to resort to short-term foreign commercial borrowings. In this regard, following is worth noting: Short term commercial borrowings only constituted around 7 percent of total external public debt, hence, it cannot influence the average time to maturity of external public debt significantly; The running-off of existing public external debt portfolio is the main reason for reduction in average time to maturity of external public debt which the writer completely ignored. Simply stated, over the last four years, this should have declined by four years while due to proper debt management, it witnessed decline of around 1.7 years which is less than half of what it could have been.

The writer baselessly claims that the government has deleted a critical indicator –“the short-term foreign currency debt as percentage of the Net International Reserves” (NIR) as that the government does not want to disclose the NIR level. In this regard, following needs to be noted: First of all, NIR numbers were compiled as one of the requirement under IMF EFF Program and NIR targets were setup only up to end June 2016. Accordingly, the government published this indicator till end June 2016. Since the IMF EFF program has now been concluded, the NIR numbers are no more compiled by State Bank of Pakistan; Secondly, the reason regarding non-publication of this indicator was also mentioned in “Debt Indicators Risk Report at end December 2016” which is acknowledged by the writer in the news report. However, as always, the writer chooses to ignore the facts with the sole objective to create sensation without substance.

The writer made another false claim that the government’s contingent liabilities have significantly increased, which showed deterioration in the performance of public sector enterprises. It is to clarify that the sovereign guarantee is normally extended to improve financial viability of projects or activities undertaken by the government entities with significant social and economic benefits. It allows public sector companies to borrow money at lower costs or on more favorable terms and in some cases allows to fulfill the requirement where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to sub-sovereign borrowers. Importantly, quantum of new issuance remains within the limit of 2 percent of GDP as prescribed under Fiscal Responsibility and Debt Limitation Act of 2005.

Finally, one must bear in mind that it is the present government and the team which took bold step of formulating MTDS and start publishing risk reports with the objective of enhancing transparency in these matters. Importantly, Ministry of Finance was publishing the risk report even without any benchmark or compulsion from the IMF or any other stakeholder. This fact needs to be recognized and appreciated by all quarters rather than hurling undue criticism based on selective dataset and questionable intent. It is clearly evident that the sole objective behind this news report is possibly creating sensation by giving false impression to the public about public debt dynamics and the time series of its sustainability indicators. 

Posted on: 2017-12-05T10:41:00+05:00