KARACHI: Interest payments on domestic debt showed year-on-year growth of 13.3 per cent during July-May period of 2014-15, said State Bank’s latest monetary policy information compendium.

The burden of debt-servicing increased in the last two years, and the fiscal year 2015 saw overloaded permanent and floating debts.

Another report of the State Bank showed that the fiscal year 2015 noted massive increase in Pakistan Investment Bonds (PIBs) which rose to Rs4.158 trillion till June 30.

Banks invested more than 96 per cent of their investment in government papers that included treasury bills. As on June 30, the stock of treasury bills reached Rs2.206tr, making the total investment in government papers at Rs6.955tr.

This debt and savings schemes critically increased the interest payments at a growth rate of over 13pc.

The State Bank reported that during July-May period interest payments reached Rs1.119tr compared to Rs988 billion in the same period of FY14. The interest payments in the entire fiscal year stood at Rs1.043tr, which was less than the 11 months of fiscal year 2015.

Highest interest payments were made for permanent debt, mostly the PIBs. During the 11 months of FY15, payments rose to Rs449bn compared to Rs217bn in the same period of last fiscal year.

The sharp increase in interest payments indicated the presence of large PIBs. The long-term PIBs were widely criticised by economists and analysts due to its cost, but the government wanted to reduce the short-term treasury bills.

The debt servicing as percentage of the GDP in the fiscal year 2014 was 4.2pc, which 4pc in 2013. It is believed that debt-servicing may further go up in fiscal year 2015 as final figures are yet to be released.

The debt-servicing is eating more than 40pc of the tax revenue, and is making an enormous pressure on the government to increase the size of tax revenue. In fiscal year 2014, debt servicing was 40.7pc of tax revenue and 28.7pc of the total revenue. Experts believe the fiscal year 2015 may also see the same figures.

The drastic cut in interest rates in the second half of the fiscal year 2015 made an impact on the coupon rates of PIBs which were reduced.

Since November 2014, the policy rates were cut by 300 basis points and return on PIBs and treasury bills was also reduced. The debt-servicing may see a cut in the fiscal year 2016.

Experts believe that it depends on the government to collect the targeted revenue and keep the expenditure within limit to avoid widening of the fiscal gap. The government could not reach the fiscal deficit target and most of the fiscal deficit was met with borrowings from scheduled banks that reached about Rs1.4tr in FY15.

Published in Dawn, August 2nd, 2015

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