Weak rupee adds Rs17bn to debt servicing

ISLAMABAD: Servicing of both domestic and external debt to cost the national kitty Rs664 billion during the current fiscal year as against the budgetary estimation of Rs647 billion due to depreciation of the rupee, officials in the finance ministry told Dawn on Saturday.


The sources said that domestic debt servicing was estimated to be Rs573 billion at the start of the fiscal year, however, upward revised estimates suggested that it would be Rs589 billion owing to inflationary factors and increased short-term loaning by the government for budgetary support and operational expenses.

“One major expense incurred by the government this year was taking over of circular debt amounting to Rs260 billion,” said an official of the ministry, adding that its interest payments would start from this year but the principal amount would be reflected in papers from next fiscal year.

However, the cost of servicing of external liabilities had been lowered due to rescheduling of many foreign debts by the international donors.

The foreign debt servicing originally estimated at $1.16 billion had now been revised to $1.15 billion by the finance ministry.

In a strategy paper prepared by the finance ministry it had been estimated that the foreign debt servicing cost in the next fiscal year would be $1.50 billion.

The finance ministry also sees further fall in the rupee value around Rs89 to a dollar in 2010-11.

As per the Fiscal Responsibility and Debt Limitations Act (FRDL) the total government debt has to be less than 60 per cent of GDP.

The strategy paper said that the Prudent Debt Management techniques had to be adopted to reduce the burden of debt servicing over the medium-term.

These include obtaining soft loans with low interest rates from external sources.

The paper said that interest payments in permanent debt were estimated at Rs63 billion and revised estimated suggest that interest payments to be Rs73 billion in the ongoing fiscal year that included Rs1 billion on federal government bonds, Rs15 billion on prize bonds, Rs53 billion on Pakistan Investment Bonds, Rs3 billion on other bonds (issued to HBL and Ijara Sukuk).

“A broad expansion in domestic debt poses significant negative connotations for private investment, fiscal sustainability and, ultimately, economic growth and poverty reduction in case of thin financial markets and poor debt management capacity,” the finance ministry strategy paper said.