ISLAMABAD, May 5: The World Bank has said that public debt-to-revenue ratio is exceptionally high in Pakistan and needs to be brought down sharply.

Official sources told Dawn here on Wednesday that the government has been told by the Bank in various meetings held recently that without taking into account the exceptionally high debt-to-revenue ratio, it would be difficult to reduce public debt.

The bank urged the government to enhance its credibility and operational relevance of its debt strategy by defining medium term debt burden goals that can become an integral part of a budgetary framework.

According to a bank's view - Refining the Debt Strategy - since the overall timeframe for working out the excessive debt burden is long, it is necessary to have debt burden goals. Public debt burden should be defined in terms of both GDP and government revenues. The bank believes that revenues are much better indicator of government's ability to service debt than GDP.

The government should set explicit medium term targets for levels of external debt in relations to exports/foreign exchange earnings so that it can achieve the Highly Indebted Poor Countries (HIPC) initiative criterion of reducing the present value of external debt to exports of goods and nonfactor services to 150 per cent (from the present level of about 200 per cent, assuming a grant element in external debt of about 20 per cent). This step, the bank believes, will strengthen the case for continued large concessionary assistance and grants.

Related to the previous recommendations, the external borrowing strategy for the next few years needs to be made explicit and linked to the fiscal deficit financing requirements so that a clear domestic borrowing strategy can also emerge.

Optimal mobilization of concessionary assistance will greatly alleviate the burden of domestic financing, and combined with financial discipline, could lead to declining real levels of outstanding public domestic debt in the not-too-distant future.

The Debt Policy Coordination Office (DPCO) should give a high priority to developing estimates of the present values of both external and public debt. The calculation value for public debt is not common.

However, because more than 50 per cent of Pakistan's public debt is external and a large part of it is concessionary, present value calculations assume special importance. Estimates of present value will help Pakistan to set more appropriate debt burden reduction goals and better enable it to monitor progress toward them.

The government, bank advises, should survey the exposure to exchange rate and interest rate risk on its external loan portfolio and, if necessary, restructure its currency composition and possibly use market-based hedging instruments to manage these risks.

The currency composition of external debt should reflect as far as possible the currency composition of the external trade and official international reserves. In addition, market based risk management such as entering into currency swaps and interest-rate swaps at the time of borrowing can hedge against exchange and interest-rate fluctuations at a relatively low cost.

Furthermore, the government could minimize the risks of commodity price fluctuations by employing commodity swaps, put options, or commodity indexed loans. Each year the DPCO should reconcile the final deficit numbers with the public debt stock changes in order to ensure the accuracy and transparency. In the past, debt growth has been consistently larger than reported fiscal deficit.

For instance, whereas the commutative recorded domestic borrowing by the consolidated government to finance fiscal deficits from 1999 to 2002 was Rs827 billion, the increase in the government's domestic debt (excluding SBP) in the same period was Rs1,054 billion. The difference arises from the government's taking on liabilities of other public sector entities or other operations outside the budget.