KARACHI –  Pakistan’s public debt witnessed rise of Rs2.3 trillion in last fiscal year (FY16), and reached Rs19.7 trillion (66.5 percent of GDP) by end of June 2016.

“This sharp increase in public debt could be largely explained by revaluation losses caused by unfavourable currency movements, an increase of Rs459.4 billion in government deposits held with the banking sector, and the increase in loans from the IMF, which are generally for balance of payments support,” said the Annual Report on the State of Economy for the year 2015-16 released by SBP Thursday.

The first two factors accounted for around 33.5 percent of the rise in public debt in FY16. While the revaluation losses (or gains) are entirely driven by movements in global currencies, the sizeable rise in government deposits represents the need to carefully monitor public debt and cash management, the report said.

According to report, there was a favourable shift in the composition of public debt in FY16: the share of external debt slightly increased, which eased pressure on domestic sources of funding.

Moreover, report said, concessionary borrowing from multilateral institutions accounted for a large part of the increase in external debt. Borrowings from domestic sources, which constituted 62 percent of the rise in public debt, also entailed lower cost due to historic low level of interest rates.

In absolute terms, domestic debt increased by Rs1.4 trillion during FY16, and amounted to Rs13.6 trillion (or 46.0 percent of GDP). Most of this increase came from longer tenor government bonds like PIBs and Ijara Sukuk, which accounted for 56.2 percent of the rise in domestic debt in FY16, and pushed the share of permanent debt to 43.6 percent by end of June 2016. These changes helped improve the maturity profile of domestic debt, report said.

Meanwhile, with a notable increase of $6.8 billion during the year, the stock of external public debt reached $57.8 billion by end-June 2016.

A fifth of this rise was attributed to revaluation losses, with the remaining reflecting higher government borrowing. Specifically, the increase in external debt mainly represents loan disbursements by the IMF ($2 billion); other IFIs ($2.1 billion); and commercial borrowing ($583 million). It should be noted that multilateral loans (especially from the World Bank and ADB), which constitute 45.7 percent of the public external debt are primarily to support reforms in the areas of taxation, doing business, trade facilitation and education, the SBP report said. Apart from being concessional, these loans are also likely to enhance the repayment capacity of the country by promoting efficiency and productivity.

Above changes in the public debt profile are less likely to change the debt sustainability perspective: the external debt does not pose any imminent risk on solvency or liquidity fronts in the foreseeable future, and the favourable shift in the composition of domestic debt has lowered the re-pricing and roll-over risks for the government. However, the need for quick recovery in Pakistan’s export earnings can hardly be over emphasized for sustaining the prevailing comfort in debt servicing, the report added.

Agriculture sector remains under stress in FY16: SBP

Agriculture sector, which contributes a lion share in GDP, remained under stress during the fiscal year 2016-17 due to depressed commodity prices and unfavourable weather conditions, according to the Annual Report of State Bank of Pakistan (SBP) released on Thursday.

The statement said that an additional factor for decline in agriculture production was pest attacks, following the erratic and heavy rains during the Kharif season. This inflicted heavy losses on the cotton crop, which was 29 percent less than the last year, the report said. However, the performance of other crops was not encouraging either. As a result, crop sector posted a negative growth of 6.3 percent in FY16, which led to a decline of 0.2 percent in overall agriculture sector for the first time since FY01.

The livestock sector, accounting for more than half the agriculture sector, grew by 3.6 percent in FY16, compared with 4.0 percent last year. Despite lower growth, this sector has been witnessing a number of encouraging developments lately, the report said. The corporate sector is stepping up the development of meat processing facilities, and positioning itself as an exporter and retailer. The government is also actively promoting this sector, and has established the Pakistan Halal Authority to promote trade and commerce in halal food products. In addition, the government has also reduced customs duty on the import of meat processing machinery, the report said.

The industrial sector posted a healthy growth of 6.8 percent in FY16, which was not only higher than 4.8 percent growth realised in FY15, but also surpassed the annual target of 6.4 percent. As noted earlier, this was primarily driven by stable macroeconomic environment; strong policy support in the form of low interest rates and a rise in infrastructure spending; better energy supplies; and an improvement in security conditions. Additional support came from ongoing China Pakistan Economic Corridor (CPEC) related projects, which created demand for construction and allied industries.

Construction activity grew by 13.1 percent in FY16, more than double the level of growth observed in FY15. This also played a key role in supporting large-scale manufacturing (LSM) due to its strong forward and backward linkages. Although growth in LSM was recorded 3.2 percent in FY16, lower than 3.4 percent last year. It was primarily due to a complete halt of operations in Pakistan Steel Mills (PSM), report said.

The issue with PSM operations led to 9.3 percent contraction in steel production during the current fiscal year. Not only did this contraction eclipse vibrancy in private steel manufacturing, it also pulled down the overall LSM growth, report said.


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