Punjab’S total foreign and domestic debt stock is on the increase in absolute terms. But it has shown a declining trend in terms of the debt to gross regional product ratio in the last few years, because of what provincial managers describe as better financial management.
Provincial finance department officials also argue that the provincial debt burden is quite small when compared with the size of the GRP (gross regional product), and hence is ‘sustainable’.
“A comprehensive Debt Sustainability Analysis (DSA), done with a 10-year horizon in collaboration with the World Bank, shows that the debt outlook of Punjab is quite sustainable from 2011-12 through 2020-21.
The debt-to-GRP ratio is projected to gradually decline over the next 10 years from four per cent in 2011-12 to just 1.2 per cent. The interest payments-to-revenues ratio will come down from three per cent to 0.9 per cent, although the debt service-to-revenues ratio is expected to rise by a modest 0.3 per cent to 3.3 per cent,” an official quoted the findings of the analysis.
As there is no threshold defined for sub-national debt levels, according to the provincial budget documents, the debt sustainability analysis defines “unsustainable fiscal policies and borrowing strategy as those that lead to an explosive accumulation of debt that could jeopardise the normal provision of services by the province”.
The debt sustainability analysis also explored the potential vulnerability to economic and fiscal shocks, such as lower economic growth and permanent or temporary increase in development expenditure through new borrowings, to conclude that Punjab’s debt sustainability is “fairly robust to most shocks except when the individual shocks are combined”. But the probability of such a scenario occurring is very low.
Under the growth shock for both provincial and national GDP (such as the devastating floods in 2010), provincial debt dynamics reverse their downward trajectory.
One possibility is that Punjab could increase its development expenditure to potentially close its infrastructure gap and raise its growth rate.
The debt sustainability analysis was based on three years rolling estimates of Punjab Medium Term Fiscal Framework (MTFF) 2011-12. Forecasts were extended to a further six years.
Punjab’s outstanding stock rose at the end of the last fiscal year to Rs445 billion from Rs414.5 billion a year earlier, but the debt-to-GRP ratio fell slightly to 3.9 per cent from four per cent.
The debt-to-GRP ratio was five per cent in 2008, and according to the finance department officials, has dropped in spite of heavy increase in development expenditure in the province and low economic growth, and not least because of energy shortages, poor economic infrastructure and deteriorating law and order situation.
The share of foreign loans in the outstanding debt has increased from 85.6 per cent in June 2012 to 91.6 per cent in June 2013, and the size of domestic loans fell from 14.4 per cent to 9.4 per cent.
The province’s foreign debt portfolio is said to be highly concessionary and of long-term maturity. In 2012-13, the average explicit interest rate on foreign debt stood at only 1.49 per cent, with average maturity of 15 years. Most of the loans have embedded fixed interest rates, and only 16 loans are on LIBOR3 terms (or on a variable interest rate).
Foreign debt — in terms of currency composition — is heavily denominated in dollars, which accounts for almost two-thirds of the foreign debt stock. During the last financial year, the province’s foreign debt stock increased by Rs48.6 billion.
Almost half of the increase in the nominal value of the foreign debt stock of the Punjab government during 2012-13 was due to translational losses, or in other words, exchange rate movements, according to the budget documents for the present fiscal year.
This impact would had been significantly larger had it not been due to appreciation of the rupee against the Japanese yen, which more than halved the depreciation impact of the national currency against the dollar during this period on the foreign debt stock of Punjab.
In the last financial year, the programme loans or non-project aid constituted almost 51 per cent of Punjab’s foreign debt stock (or Rs204 billion), while the remaining 49 per cent, or Rs199.3 billion, came in the form of project finance. The latter category appears to be focused on irrigation (20 per cent), roads, infrastructure and agriculture (six per cent each), housing and water supply (five per cent) and education, training and social welfare (three per cent each).
Programme (non-project) loans, on the other hand, were primarily devoted to three sectors: education, governance, and poverty reduction.
The domestic debt portfolio of the province is composed mainly of expensive cash development loans (CDLs) with long-term maturities from the federal government.
These loans are now being repaid for the past several years, which has helped reduce the domestic debt stock. Domestic debt also contains debt from the State Bank of Pakistan.
Punjab’s total debt servicing in 2012-13 stood at Rs46.6 billion (6.5 per cent of total provincial revenues). Almost 65 per cent of the servicing was on account of domestic debt, even though it constitutes only 9.4 per cent of the total provincial debt. This is not surprising, given that domestic debt has been contracted on expensive terms.
Interest payments on total debt, which peaked at Rs20.1 billion in 2009-10, have now come down to Rs15.8 billion — the second consecutive year of decline in interest payments. Similarly, interest payments relative to debt have also been declining.