Weak rupee drives up external debt

KARACHI: The central government’s debt, both within the country and to foreign entities, surged by nearly a third in the 12 months through August, reaching close to Rs64 trillion, State Bank of Pakistan data showed on Thursday.

The 29 per cent increase in debt amounted to Rs14.4tr, as the figure stood at Rs49.57tr by the end of August 2022.

Of the total amount, domestic debt rose 23pc to Rs39.79tr, up from Rs32.15tr in August 2022, whereas external debt jumped 39pc to Rs24.17tr, up from Rs17.42tr a year ago.

This rise in domestic debt is concerning as it takes up most of the country’s tax revenue, reducing funds available for development and slowing down economic growth. A significant chunk of the revenue is now being used just to service (pay off the interest and principal on) this debt, at the expense of economic growth.

In the first two months of this fiscal year (FY24), the total central government debt jumped 5.1pc. Factors like the high inflation rate of 29pc and interest rate of 22pc over these two months drove up domestic debt.

On Wednesday, a Senate panel was told that the country’s domestic debt is estimated to have shot up by more than Rs7tr since January last year just because of an increase in the State Bank’s policy rate from less than 10pc to 22pc.

A senior official told senators that as a rule of thumb, a 1pc hike in interest rates translated into Rs600bn addition to debt.

The SBP’s policy rate increased from 9.75pc in January 2022 to 12.25pc in April of that year and then to 22pc by the end of June this year. Meanwhile, domestic debt has increased by Rs7.35tr since January 2022 and by almost Rs6tr since April 2022.

As for external debt, the more pronounced percentage increase can be attributed to the rupee’s depreciation against the US dollar. This means the local currency can buy less, making the debt appear larger when converted to rupees.

August saw a significant rise in external debt, as it shot up by Rs1.44tr, more than double the increase of Rs700bn a month ago. On average, external debt jumped by Rs563bn per month during August 2022 and August 2023.

The external debt’s higher increase during July and August reflects the rupee’s devaluation. The dollar’s value went up to Rs307 in early September, inflating the external debt’s value when converted to PKR. But the rupee’s value has begun to recover, appreciating by 7.5pc from its lowest point, which will be visible in September’s external debt data.

However, currency experts believe that for the external debt to reduce significantly, this trend of the dollar’s devaluation needs to continue.

A country’s ability to manage its external debt is often tied to its foreign exchange reserves. However, the State Bank on Thursday reported a dip in its forex reserves, which fell by $21 million to $7.615bn in the week ending on Sept 28.

The country’s total foreign exchange reserves stand at $13.03bn, including $5.42bn held by commercial banks. For the whole of FY24, Pakistan needs about $25bn just for debt servicing.

Even though the government has been consistently paying off its debts, there hasn’t been a significant inflow of funds since July, when the IMF provided $1.2bn and Saudi Arabia and UAE also pitched in. This boosted the reserves to $8.15bn from $4.46bn in June.