The government is examining the possibilities of external financing

• Plans to meet most medium-term needs through 10- to 15-year bonds, leveraged multilateral loans
• The aim is to diversify domestic debt instruments into inflation-linked bonds, to include government securities in the stock exchange

ISLAMABAD: With the International Monetary Fund (IMF), the government is considering meeting most of its medium-term external financing needs through 10 to 15-year international bonds and concessional multilateral loans.

It also plans to diversify domestic debt instruments into inflation-linked bonds, list government securities and issue short-term Islamic and conventional floating rate products.

This is part of the new Medium Term Debt Management Strategy, 2023-2026, launched by the Ministry of Finance at the weekend. for the fiscal year.

“Maximum beneficial use of external financing from bilateral and multilateral development partners” is one of the measures of the strategy to increase the average maturity of the external debt portfolio in the medium term, adding that other measures will include “more borrowing 10 years and 15 years in the international capital market, while taking into account the cost and risk trade-offs.

Multilateral loans provide the borrower with maximum flexibility in choosing the grace period, final maturity and amortization structure. In such cases, the government will choose a relatively higher average term to maturity while ensuring a smooth maturity profile of its external sovereign debt portfolio.

At the same time, the government would increase its efforts to close new commercial loans with relatively longer maturities (three years or more) compared to existing maturities of one year or less.

In addition, efforts would be focused on re-profiling the stock of existing commercial loans from short-term to medium-term and long-term.

According to the strategy, the local market will continue to be the main source of funding for financing the fiscal deficit and refinancing the existing domestic debt, for which the government plans to introduce several instruments to expand the investor base and offer diverse investment opportunities to closer investors. investment horizons, income preferences and risk appetite.

To this end, the government has also considered the possibility of introducing inflation-linked bonds to attract insurance companies, pension funds and mutual funds, which prefer to purchase these instruments to manage their liabilities.

The government is also considering listing and trading government securities on the stock exchange to support attracting investors.

There is also an option to use lightweight structures based on Ijara, Murabaha or any other Shariah compliant way of raising funds as the funds available to the government are limited.

“The government may also consider bond swap and buyback operations to manage rollover and refinancing risk by consolidating a large number of outstanding securities into smaller and more liquid instruments,” the ministry’s strategy paper said.

Savings certificates in digital form

In addition, National Savings Scheme (NSS) certificates will be available for digital purchase through the Central Depository (CDC).

In the non-banking sector, most of the additional revenue is expected to be mobilized through NSS. In this regard, the government would intensify its efforts to increase the participation of private investors in government securities, both in the primary and secondary markets.

“The ultimate objective is to use exchanges for the primary market/auction of government debt securities to ensure wider exposure and enhance participation of the retail segment,” it said.

Speaking about the strategy of increasing multilateral funding, the FM pointed out that with renewed efforts to speed up the pace of project implementation, project support costs will increase in the medium term.

On the other hand, since policy-based financing is related to macroeconomic stability, it predicted that structural reforms initiated by the government would increase macroeconomic stability.

“With improving macroeconomic indicators and faster project implementation, costs to multilateral and bilateral creditors are expected to increase in the medium term,” it said.

The Ministry stated that the macroeconomic forecasts indicate a medium-term downward trajectory of the national debt-to-GDP ratio, which has increased in recent years.

The average maturity of external debt has decreased in recent years from 10 years in 2012-2013. per year up to seven years in 2018-2019. per year and further up to 6.2 years by the end of June 2022.

This is mainly due to the depletion of the existing portfolio and the fact that the government had to partially meet the increasing external financing requirements from commercial sources. “Commercial loans are closed according to market conditions, ie at relatively higher costs and a shorter term,” the newspaper said.

However, risks remained higher, although the medium-term fiscal framework 2023-2026 2018 was primarily focused on recovery from the economic and fiscal impact of catastrophic floods, the post-Covid scenario, the Russia-Ukraine conflict and global inflationary pressures. sustainable fiscal policy in the medium term.

This is based on the assumption that the government would reduce the budget deficit from 7.9 percent of GDP in 2021-22. per year to 3.1 percent by 2025-2026. , with annual average inflation falling sharply to around 6.5 percent by 2025-2026. for the year, taking into account the improvements. commodity-producing sectors (agriculture and industry), effective monetary policy and tighter fiscal discipline.

“With increasing investor confidence, stable inflation, a fairly valued exchange rate, an improved current account balance and better fiscal and monetary management, economic growth is projected to reach 5.5% per annum by FY26,” the paper said.

In the medium term, lower inflation is expected to reduce government borrowing costs. However, lower tax revenues may lead to larger fiscal deficits, which will be financed by higher borrowing, and thus reduce fiscal space for development and social sectors.

In addition, the government is targeting a higher increase in the collection of the Federal Board of Revenue and any shortfall will have a negative impact on the government’s projected fiscal position. The impact of climate change can also have a negative impact on the macroeconomic system.

Published in Dawn, July 3, 2023

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