Debt: Pakistan

Permanent Debt

It refers to long-term borrowing by the government in the form of market loans (for Wapda, OGDC, etc), prize bonds, federal investment bonds (non-bank) and FEBCs.

Bearer national fund bonds introduced in 1985-86 were also part of the permanent debt but were discontinued in 1991-92.

Floating Debt

This debt stands for short-term borrowing of less than a year. Treasury bills of different types and cash credit accommodation from commercial banks are notable components of this form of debt which is raised mainly for ways and means to support the government.

Unfunded Debt

This represents the net proceeds of various small saving schemes launched by the government. Details of domestic debt in Table 6 indicate that the floating debt has been the most significant component of the total debt in the ’80s. This was mainly due to low interest rate which treasury bills usually carried. Since 1989-90, however, there has been some decrease in the amount of floating debt as the government is being asked by international agencies to raise domestic debt on competitive ground. As a result the amount of permanent debt increased dramatically in 1990-91. But floating debt presents a special problem from Islamic point of view. It is one of the major sources of interest earning of the State Bank of Pakistan. Any effort to remove intergovemment interest should, therefore, take notice of this aspect of the public debt.

The most significant development relating to domestic debt in the last few years is a dramatic increase in the size of unfunded debt. This debt was only about one-third of the floating debt in 1980-81 but by 1990-91 it became more than the latter (Rs 137.5 billion as opposed to Rs 135.6 billion for the floating debt). Since unfunded debt carries very high rate of interest as opposed to the other two categories the total interest liabilities of the government on this account have been disproportionately high. For example, in 1985-86, when the size of unfunded debt was only 28 percent of the total domestic debt, die interest payment of the government on this head was 48 percent of the total interest on domestic debt (Table 6). This figure became as high as 53 percent in 1988- 89 but came down to 33 percent in 1991-92 due to increase in the share of permanent debt in that year.

Cost of Borrowing for Domestic and Foreign Debt in Pakistan Table 6

Dr Faiz Muhammad

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.