ISLAMABAD: With a view to provide financing for government at low cost over medium to long term, the government has developed its first medium-term debt management strategy (MTDS) by giving due consideration to risks.

An analysis of public debt reveals that the debt-to-GDP ratio stood at 62.7 per cent in 2012-13, consequently the debt-servicing consumed around 41pc of the total revenues.

Over the past few years, composition of public debt has shifted towards domestic debt and furthermore into shorter duration instruments which is a source of vulnerability and entails high rollover and refinancing risk. As on June 30, 2013, around 34pc of total public debt stock was denominated in foreign currencies which exposes debt portfolio to exchange rate risk, according to a document.

The government intends to strengthen public debt management functions as debt management operations are fragmented across several agencies and presently the DPCO has a limited role in public debt management.

The MTDS provides alternative strategies to meet the financing requirements of the government. The four different borrowing strategies have been assessed with associated costs and risks analysis under the alternative interest and exchange rates scenarios.

The cost and risk trade-off analysis is based on the existing debt cash flows, market and macroeconomic projections and alternative borrowing strategies. The robustness of alternative debt management strategies was evaluated by applying stress/shock scenarios for interest rates and exchange rates.

The MTDS contains a policy advice on an appropriate mix of financing from different sources with the spirit to uphold the integrity of the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005.

According to the MTDS document, Pakistan needs to follow the strategy which results in lengthening of its maturity profile to reduce the refinancing risk along with providing sufficient external inflows in the medium term to reduce the pressure on domestic resources keeping in view cost-risk trade-offs.

The MTDS also provides strategic guidelines for comprehensive debt management which include widening of investor base; development of domestic debt markets; lengthening of maturities of debt instruments; and stimulation of external finance.

Published in Dawn, February 8th, 2015

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