Debt reprofiling: did the Finance Ministry get it right?


Debt. If poorly managed, a four-letter word can bring you incredible insomnia. Think about it, how does the finance minister of the Pakistani government or any government related to this fall asleep? Will they wake up in a cold sweat from their dream mar? Or did they uncomfortably underestimate the terms “deficit”, “IMF” and “insomnia”? This is a heavy responsibility.” This is the wrong step. You have caused billions or even trillions of rupees in losses to the country. Even worse, it is possible to receive a call from the National Accountability Bureau (NAB).

One such step that is often criticized in the economic world but never fully understood is the domestic debt reshaping carried out by the Ministry of Finance (MoF) last year. In short, the government decided to issue new bonds to achieve two goals: reducing the frequency of repayment of government bonds (by extending the average maturity of bonds), and taking advantage of lower interest rates and issuing new bonds to pay off at lower interest rates. Old bonds with high-interest rates.

It seems simple, but it seems that the government may not handle the process in the best way to reduce its debt servicing and raise concerns about capacity, or worse, favor banks. , In the transaction chosen by the government for debt reshaping.

What did the Ministry of Finance do?

On June 30, 2019, before the end of the fiscal year, the Ministry of Finance changed the government’s existing SBP debt from short-term (6 months) to medium- and long-term (1 to 10 years).

Approximately 70% of the debt is reconfigured into a 10-year floating rate PIB. Floating interest rate PIB is a new type of bond whose interest rate fluctuates with changes in policy interest rates. As a result, as the policy rate fell, the interest payments on these bonds also increased.

However, the remaining 30% is reconfigured as a fixed-rate PIB with a maturity of 2 to 5 years. Although these ratios are only 30%, which is negligible compared with the former, the government continued to do so when the policy interest rate reached its highest level in eight years. Moreover, the decision to re-allocate debt into fixed-rate bonds at that time caused much controversy.

Simply put, why did the government decide to re-allocate debt when the benchmark interest rate is as high as 13.25%?

Dept Reprofiling

Consider the situation at the time of the transaction in June 2019. Inflation is rising rapidly, so the National Bank has raised interest rates by 325 basis points in the past six months to control inflation. Although the government cannot accurately predict the direction of inflation, there is ample evidence that economists inside and outside the government believe that inflation may not rise further, which means that interest rates may not rise further.

The Ministry of Finance cannot reasonably know that interest rates peaked in June 2019, but it can reasonably infer from the private sector and government economists that interest rates are unlikely to rise further. So, why choose to reallocate debt immediately after a radical interest rate rise cycle? Why lock in high interest rates?

Former Finance Minister Miftah Ismail said there was nothing wrong with the reconfiguration. “There is absolutely nothing wrong with long-term debt. However, choosing to make this decision when the policy interest rate is 13.25% is not the right time.” He said. “It hardly makes sense.”

Indeed, the best time to revaluate government debt is at any time between May 2016 and January 2018. This is a period of nearly 20 months. At that time, the benchmark interest rate was 5.75%, the lowest possible time in the past 30 years. Find data from the National Bank.

Another fact is that the reallocated debt is the government owed the National Bank and not other borrowers. Government debt held by the National Bank is different from other types of debt.

The interest paid by the Ministry of Finance to SBP is returned to the government in the form of non-tax income, while the National Bank profited from these loans and then returned to the government in the following form: dividends. Fundamentally, this means that the government is repaying the loans it has provided-money is transferred from one hand to the other, and then back to the first hand.

This is the main reason why borrowing from your own central bank is considered an inflationary move, because it increases the money supply: in short, it is the same as literally printing money to pay for what the government wants to buy. It issued debt.

What impact will the relocation have on Pakistan’s debt?

After the relocation, the government was able to reduce domestic debt due within one year to 37% of total debt in June 2019, compared to 66% in June 2018. This is done to reduce the risk of refinancing. In addition, this has helped increase the average maturity of domestic debt to 4.2 years in June 2019, which has dropped to 1.6 years in June 2018. This is in line with the long-term goal set by the government for domestic debt. portfolio.

But first, explain the meaning and importance of these terms. The government issues two main types of debt: T-bills (T-bills) and Pakistan Investment Bonds (PIBs). Treasury bills are debts issued by the government with a maturity of one year or less. The term of PIB usually exceeds one year, and the term of issuance is generally 3 years, 5 years, 10 years, 15 years and 20 years. Investors receive interest every six months. They are a tool for interest-bearing notes and are issued in a paperless form. This means there is no physical form.

There are other terms to understand, such as the difference between permanent debt, floating debt and unfunded debt.

Permanent debt includes medium and long-term debts such as national debt, or investment bonds with longer maturities, with maturities of 3 years, 5 years, 10 years, 15 years and 20 years. They are usually sold through first-tier distributors through auctions every quarter.

Main dealers are banks or other financial institutions appointed by SBP to participate in government securities auctions (in Pakistan, they are just banks). Generally, the longer a bond matures, the higher the bond’s return due to time-related risks. These are referred to as Pakistan Investment Bonds or PIBs.

Floating debt consists of short-term borrowings that mature in one year or less in the form of Treasury bills or Treasury bills, and can mature within 3, 6 and 12 months. Investors get all bonds that mature, and these bonds are usually sold at a discount below their par value and are zero coupon bonds. The difference between the selling price, discount and maturity price is the interest on the Treasury bill. They are sold through primary dealers in an auction every two weeks.

Do not confuse it with floating-rate debt, which simply means that the interest rate on the debt is fixed. Floating rate debt can be of any maturity. Historically, the Pakistani government did not issue long-term floating-rate debt, but it chose to do so for reanalysis.

Unfunded debt is the outstanding balance of various national savings plans, mainly composed of various tools available under these plans.

After an increase of 43,150 billion rupees in fiscal year 2019, domestic debt reached the level of 20,732 billion rupees by June 2019. As a result of relying on domestic sources to raise funds for the fiscal deficit, there has been a growth buffer in domestic debt and the difference between cash and the realized value of PIB.

The government mainly relies on SBP’s short-term debt in the form of market-related treasury bills (MRTB). This debt helped them pay off their due debts. The government has been collecting MRTB until May 2019.

Pakistan’s permanent debt was recorded at 120,87 billion rupees at the end of the 2019 fiscal year. In recent years, due to the inverted yield curve, banks are reluctant to purchase long-term debt, and permanent debt has been declining. This is an unusual situation. When the long-term interest rate is lower than the short-term interest rate (usually, the short-term interest rate is often lower than the long-term interest rate).

“Commercial banks predict that when inflation drops, the policy interest rate of 13.25% will definitely fall. That’s why they are willing to borrow at a lower interest rate for a long time, because they know that 13.25% interest rate is unsustainable,” the famous economy The scientist Hafeez Pasha said. “The market, especially banks, are rational participants.”

What did this exercise achieve?

One might say that the inverted yield curve is a signal of market confidence that inflation will fall. The government would consider this to be the result of correct communication with the market that correctly announced the target in advance.

For example, after a re-analysis in January 2020, the benchmark interest rate is 13.25%. One would expect that coupons on ten-year bonds would be auctioned at a price higher than the discount rate. However, the bank purchased ten-year notes at 10.88%. This is a saving of 2.67% compared to the 20 million rupees auctioned on January 9, 2020. This is just one example of the net cost savings that can be achieved after reconfiguration.

However, considering that net savings will also reduce the government’s dividends from the National Bank, the net impact on government finances is relatively small. Pasha called the reconfiguration an “accounting exercise.”

So, what has the government achieved from this work, and if there is no real change, why should it be carried out?

Well, budget deficits and major deficits are two very different things. A major deficit is when government expenditure (excluding debt repayment) exceeds total government revenue. Pasha said: “The government adjusted the tone to reduce the main deficit because the International Monetary Fund (IMF) is concerned about this.”

“This is an accounting technique that will not affect the budget deficit.” This allows the government to artificially reduce the basic deficit. As a result, Pakistan will be able to convey the message that Pakistan can fully repay its debt without borrowing.


Pasha believes that Pakistan will soon be able to generate a major surplus. This means that the International Monetary Fund can say that Pakistan has reached market maturity. “After all, what matters is what happened to your public debt, and this is not limited to the main deficit. What about the overall deficit?”

Sayem Zulfiqar Ali, a financial market expert at the Asian Development Bank (ADB), explained: “The decision to reset the profile helped the government improve its maturity status. Previously, they faced very large payments every two weeks. This also helped. Improve cash flow.”

However, one advantage that people have not noticed is the price advantage that the government can obtain. He said: “The government will have to carry forward more than 2 trillion rupees in maturity every two weeks, and must raise an equal amount from commercial banks and entities.” “This provides market pricing for banks and investors. To charge the government more.”

In simple terms, suppose you want to obtain a loan of 100,000 rupees from the bank. Compared to your request for a loan of Rs 10 crore, the bank may charge you less interest and provide you with more relaxed terms. After the reconfiguration, only 12 primary dealers purchased bonds, so the government no longer needed to enter the market to raise a lot of funds. After the relocation, the impact of these banks on government borrowing was reduced.

As a result of the reanalysis, the government set smaller goals. This has led to market competition among market participants.

What about the private sector?

Ismail said that the decision to reshape the decision should not be unnecessarily criticized, but he said: “On the contrary, it makes more sense for the government to reshape market debt.”

It is generally considered easier to reassess SBP debt. After all, SBP is a government agency, albeit autonomous. However, it is not easy to convince the private sector. Similar to the G20 relief, private sector creditors refuse to provide relief to emerging market participants. Although the government may have to leave banks no choice but to reshape debt, this runs counter to best practice.

“However, it is not easy to re-divide the debt of the private sector. Even if an investor exits, the transaction will fail.” Ali explained. “There are no definite guidelines, so it is difficult to implement.”

Although the government has not redistributed its existing short-term market debt, it plans to do so in a different way. With the maturity of short-term debt, the government is now issuing long-term debt. It can be seen that the government formulated a new strategy last year, which can be observed through auctions.

For new borrowings, the dependence on short-term is low, and the dependence on long-term is high. It is not the extra money raised from the Treasury bills, but the money raised from the People’s Bank. As a result, the Ministry of Finance adopted an aggressive strategy, and short-term debt as a percentage of total debt fell. However, although the stock of t bills has declined in percentage terms, it is not absolute. Based on the trend this year, it can be assumed that as the stock of bills continues to decrease and new borrowings are made through PIB, their absolute value will also decline.

Ali explained that the Pakistan market, dominated by banks, will not actively occupy the market in the long run. In order to overcome this problem, the government has introduced new long-term floating interest rate instruments with different tenures for investors who do not want to bear interest rate risks, in order to get rid of the confusion between floating PIB and floating interest rates as part of permanent debt. Debt, that is, in the short term, the ministry also hopes to rename these terms to make communication clearer.

What is the government revenue of SBP?

Simply put, the government did not borrow from SBP due to inflationary pressures. However, it is obvious that as the government repays its debt every year, the income from SBP will decrease, and will eventually be reduced to the normal income earned by SBP itself.

Government sources said that the decision to reshape is closely related to the decision not to borrow from SBP. Not only is it an ideal function, it is considered a good practice worldwide, but it also contributes to the development of the private market.

Is SBP immune to government influence?

As the government decides not to borrow from SBP, one might say that this is still done through SBP’s y-foot move. The Ministry of Finance believes that SBP can inject liquidity at any time when needed. One might argue that the injected liquidity has flowed back to the government.

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