4 Fiscal Policy and Public Debt

4.1 Overview
The fiscal deficit was 1.3 Figure 4.1: Fiscal Balance Indicators (Percent of GDP)
percent of the GDP in Q1- Fiscal balance Revenue balance Primary balance
FY17 – the highest quarterly 0.4
deficit since FY12. The
primary balance, which 0.0
excludes interest payments, -0.4
percent

also posted a deficit of 0.1

percent of GDP after showing -0.8
a surplus in the last four years -1.2
consecutively (Figure 4.1).
-1.6
Q1-FY12

Q1-FY13

Q1-FY14

Q1-FY15

Q1-FY16

Q1-FY17
High fiscal deficit in Q1-FY17
was primarily an outcome of
low revenue generation. The Source: Ministry of Finance
performance of revenue was
not in line with the full year target of over 20 percent revenue growth. While tax
collection also slowed down considerably, the major drag came from a sharp
decline in non-tax revenues (Table 4.1).

Non-tax revenue declined mainly due to the absence of Coalition Support Fund
(CSF) and lower SBP profit.1 Furthermore, dividend income from Public Sector
Enterprises (PSEs) declined by around 70 percent as a number of PSEs reported
reduced profit in Q1-FY17.

Shortfall in revenue collection overshadowed a welcome decline in current

expenditures. Encouragingly, development spending recorded an increase of 12.4
percent in Q1-FY17, on top of 47.4 percent increase in the last year. This indicates
government’s continued focus on achieving inclusive growth through
infrastructure build-up and promotion of export oriented sectors as well as
neglected agriculture sector.2

1
Pakistan received US$ 713 million as CSF in Q1-FY16. Similarly, SBP profit decline to Rs 39.4
billion in Q1-FY17 compared to Rs 67.6 billion in Q1-FY16.
2
In FY17 budget, the government announced zero rating facility on purchase of raw materials to five
major export oriented sectors including textile, leather, sports goods, surgical goods and carpets.
The State of Pakistan’s Economy

Table 4.1: Summary of Fiscal Operations

billion Rupees
Actual % of GDP
Budget FY17 Q1-FY16 Q1-FY17 Q1-FY16 Q1-FY17
A. Total revenue 5,347 937.0 862.2 3.2 2.6
Tax revenue 4,306 723.5 739.2 2.4 2.2
Non-tax revenue 1,041 213.5 123.1 0.7 0.4
B. Total expenditure 6,623 1,265.2 1,300.1 4.3 3.9
Current 5,198 1,085.2 1,070.7 3.7 3.2
Interest Payments 1,360 415.9 414.3 1.4 1.2
Development 1,435 169.9 191.1 0.6 0.6
Net lending -10 -1.2 -0.3 0.0 0.0
C. Statistical discrepancy 0 11.2 38.6 0.0 0.1
Fiscal balance (A-B-C) -1,276 -328.2 -437.9 -1.1 -1.3
Revenue balance 149 -148.2 -208.5 -0.5 -0.6
Primary balance 84 87.8 -23.6 0.3 -0.1
Financing 1,276 328.2 437.9 1.1 1.3
External sources 234 55.3 68.8 0.2 0.2
Domestic sources 1042 272.9 369.1 0.9 1.1
Banks 453 139.5 299.7 0.5 0.9
Non-bank 539 133.5 69.3 0.5 0.2
Privatization proceeds 50 - - - -
% Growth
Total Revenue - 11.6 -8.0 - -
Tax revenue - 15.4 2.2 - -
Non-tax revenue - 0.3 -42.3 - -
Total expenditure - 7.5 2.8 - -
Current - 3.2 -1.3 - -
Development - 47.4 12.4 - -
Source: Ministry of Finance

The fiscal deficit in Q1-FY17 was predominantly financed through SBP

borrowings. Although financing from external sources increased, the non-bank
financing fell to almost half in Q1-FY17 compared to the level in Q1-FY16. The
total public debt increased by Rs 866.1 billion during Q1-FY17, reaching Rs 20.5
trillion as of end-September 2016. Most of this increase, about 88 percent, was
due to domestic debt. In particular, government mobilized more financing through
short-term papers.

4.2 Revenues
The revenue collection declined by 8.0 percent during Q1-FY17, compared to 11.6
percent increase in the corresponding period of last year. This decline in revenue
was primarily due to a sharp contraction of 42.3 percent in non-tax revenues
(mainly due to absence of CSF and lower SBP profit), while growth in tax

40
 First Quarterly Report for FY17

revenues also slowed down Figure 4.2: Last 5-years Average Share of Quarterly
considerably to 2.2 percent Revenues
during Q1-FY17. Therefore, 35
revenue collection during the
quarter remained well below 30
expectations, achieving only
16.0 percent of the overall 25

percent
target for FY17. The seasonal
pattern shows the revenue 20
collection during Q1 is usually
15
little over 20 percent of the
annual target (Figure 4.2).
10
Q1 Q2 Q3 Q4
The shortfall in first quarter Source: Ministry of Finance
implies that a much higher
growth, 27.8 percent, is required in subsequent quarters to achieve the annual
target of Rs 5,347 billion, which appears challenging.

FBR taxes
FBR taxes, which constitute around 85 percent of the total (federal and provincial)
tax collection, witnessed a slowdown during Q1-FY17 (Table 4.2). The major
drag came from a decline of 3.4 percent in direct taxes. A combination of factors
has contributed to this slowdown in FBR tax collection, including: (i) low
corporate profitability combined with government’s decision to reduce the
corporate tax rate by 1 percent; 3 (ii) exemption in taxes on green-field industrial
undertakings; (iii) increase in tax credits for employment generation, BMR and
enlistment on stock exchange; (iv) government’s decision to keep POL prices

Table 4.2: FBR Tax Collection

billion Rupees
Percent Growth
Budget FY17 Q1-FY16 Q1-FY17
Q1-FY16 Q1-FY17
Direct Taxes 1558.0 239.7 231.6 26.3 -3.4
Indirect Taxes 2063.0 350.5 393.4 0.7 12.2
Customs Duty 413.0 79.6 100.9 23.4 26.7
Sales Tax 1437.0 243.4 261.5 -5.7 7.4
FED 213.0 27.5 31.1 8.2 13.0
Total Taxes 3621.0 590.2 625.0 9.7 5.9
Sources: Federal Board of Revenue

3
In particular, banks’ profitability decreased by about 11.9 percent in Q1-FY17.

41
The State of Pakistan’s Economy

unchanged in the face of increase in international crude prices, and; (v) decline in
production of cigarettes following increase in excise duty. Here, it is important to
acknowledge that despite some adverse implications of these initiatives in the
short run, they are expected to contribute favorably by stimulating economic
growth and increasing the size of the overall tax base, going forward.

Apart from decline in direct Figure 4.3: Break up of Direct Taxes

taxes, the share of withholding Collection on demand Voluntary payments
taxes (WHT) continues to get Withholding taxes
100%
bigger, rising to 75 percent of
direct taxes in Q1-FY17. On 80%
the other hand, the shares of
Voluntary Payments and 60%
Collection on Demand in
direct taxes are declining 40%
(Figure 4.3). The increase in
the share of withholding taxes 20%
has strong implications for low
0%
income people due to its Q1-FY13 Q1-FY14 Q1-FY15 Q1-FY16 Q1-FY17
regressive nature, as Source: Federal Board of Revenue
businesses re-price their
products to pass it on to the consumers.4

Within the FBR tax collection, the decline in direct taxes was more than
compensated by a broad-based recovery in indirect taxes, which grew by 12.2
percent during Q1-FY17 compared to a mere 0.7 percent growth in Q1-FY16. A
sharp increase in collection of custom duty by 26.7 percent during Q1-FY17, on
top of 23.4 percent in the same quarter last year, is explained by: (i) increase in
imports (especially related to construction, power and transport); (ii)
simplification of tariff slabs, and; (iii) increase in custom duty, especially for
higher tariff slabs.5

It is worth noting that sales tax collection increased by 7.4 percent during Q1-
FY17 against a decline of 5.7 percent observed during Q1-FY16, despite a sharp
decline of 33.8 percent in domestic sales tax collection from petroleum.6 The
decline in the latter, notwithstanding increase in petroleum sale by 20 percent, can
4
Anecdotal evidence suggests that low income segment suffers the most from WHT due to less
flexibility in the choice of their consumption of basic necessities and life cycle emergencies.
5
The value of import has grown by 10.5 percent during Q1-FY17.
6
Petroleum accounts for one third of total domestic sales tax collection.

42
 First Quarterly Report for FY17

be traced to FBR’s decision to Figure 4.4: Domestic and International Oil Price Trend
switch to ad-valorem tax from Petrol Diesel
the fixed rate.7 Second, and Kerosene Crude Oil (rhs)
more importantly, government 100 60

kept domestic petroleum

90 45

US$ per barrel

prices unchanged and

Rs per liter
absorbed the incremental 80 30
increase in crude oil prices in
terms of lower effective tax on 70 15
petroleum products (Figure
4.4). In fact, the recovery in 60 0

Nov-15

Apr-16

Jun-16
Dec-15
Oct-15

May-16
Mar-16
Sep-15

Feb-16

Sep-16
Jan-16
Aug-15

Aug-16
Jul-15

Jul-16
sales tax collection, besides
showing the impact of changes
in taxes and tax rates, indicates Source: PBS (domestic prices ), IMF(international prices)
increase in domestic demand
and improving real economic activity.8

Likewise, an increase of 13 percent in FED during Q1-FY17, compared to 8.2

percent growth observed during the same period in the previous year, reflects
improved production of manufactured goods (mainly cement and beverages) and
increase in travel services, which together constituted around two third of FED
collection during Q1-FY17.9 However, collection from cigarettes fell to almost
half during Q1-FY17 compared to the corresponding period last year.10

Non-tax revenues
Non-tax revenues declined by 42.3 percent during Q1-FY17 compared to 0.3
percent increase in previous year (Table 4.3). A number of factors have
contributed to this sharp decline. The main among these include the absence of
Coalition Support Fund (CSF) and a decline in SBP profit. It is important to note
that Pakistan received Rs 73.4 billion under CSF in Q1-FY16. The SBP profit

7
FBR vide SRO 490(I) 2016 dated June 30, 2016.
8
For instance, in budget FY17, 8 percent FED applicable on sugar was replaced with an 8 percent
sales tax. Similarly, sales tax on imported mobiles has been increased from Rs 500 to Rs 1000 for
medium category, for high category it is revised upward to Rs 1500 from Rs 1000 while for the low
category it is kept unchanged at Rs 300.
9
In budget FY17, the existing FED applicable on 5 percent of retail price of cement is replaced with
fixed rate basis to Rs 1/kg.
10
This decline in collection from cigarettes was due to: (i) pre-budget expectations of increase in
tariff/excise duty, which fueled storage of cigarette to exploit higher margins – reducing thereby new
production temporarily; and (ii) widening of price differential between tax paid and non paid brands
spurred the demand for the latter.

43
The State of Pakistan’s Economy

also declined to Rs 39.4 billion in Q1-FY17 compared to Rs 67.6 billion last year,
mainly driven by reduction in government borrowing from SBP by end-FY16.
Table 4.3: Non-tax Revenues
billion Rupees
Actual
Budget FY17
Q1-FY16 Q1-FY17
Mark-up (PSEs and others) 81.1 0.9 0.8
Dividends 85.0 16.3 5.0
SBP profits 280.0 67.6 39.4
Defence (including CSF) 171.0 75.7 1.7
Profits from post office/PTA (3G) 81.0 0.0 0.1
Royalties on gas and oil 43.0 17.6 14.3
Passport and other fees 25.0 3.4 2.6
Discount retained on crude oil 10.0 2.1 2.1
Windfall levy against crude oil 10.0 1.0 0.3
Others 254.9 28.8 56.9
Total non-tax revenue 1,041.0 213.5 123.1
Source: Ministry of Finance

Furthermore, dividend income from PSEs declined by around 70 percent in Q1-

FY17. A number of PSEs, including OGDCL, PPL, SNGPL, FFC, and PSEL,
reported reduced profit in Q1-FY17. The prevailing low oil price also dented the
profitability of oil and gas companies and affected royalties on oil and gas as well
as windfall levy on crude oil.11

4.3 Expenditures
The consolidated fiscal spending increased marginally by 0.6 percent in Q1-FY17
compared to 7.1 percent growth registered in Q1-FY16. This was primarily due to
decline in current expenditure as growth in development expenditure remained
robust (Table 4.4). The current expenditure of both federal and provincial
governments registered a decline in Q1-FY17.

The consolidated current expenditure in Q1-FY17 decreased by 1.3 percent,

mainly due to a marginal decline in the interest payments and other expenditure
including subsidies.12 In spite of lower interest rate environment, the interest

11
Although oil prices were rising, these remained lower on average in Q1-FY17 compared to the
average price in Q1-FY16.
12
Other expenditures mostly consist of salaries and wages and subsidies. As salaries and pension
benefits were set to increase after announcement of 10 percent increase in basic pay and pensions
from 1st July 2016 in the FY17 budget, this decline was more probably due to reduction in subsidies
in Q1-FY17.

44
 First Quarterly Report for FY17

payment decreased by a mere Rs 1.7 billion during Q1-FY17.13 This is mainly

because of accumulation in public debt stock, which rose to Rs 19.7 trillion by
end-June 2016.
Table 4.4: Analysis of Fiscal Spending
billion Rupees
Actual Growth
Q1-FY15 Q1-FY16 Q1-Y17 FY16 FY17
Current expenditures 1050.1 1085.2 1,070.7 3.3 -1.3
Federal 772.1 768.2 757.8 -0.5 -1.4
Interest payment 394.5 415.9 414.3 5.4 -0.4
Defense 164.6 145.6 151.5 -11.5 4.0
Public order and safety 21.3 21.8 24.0 2.4 10.5
Others 191.8 184.9 168.0 -3.6 -9.1
Provincial 278.0 317.0 312.9 14.0 -1.3
Development expenditures 115.7 169.9 191.1 46.9 12.4
PSDP 93.0 146.4 167.1 57.4 14.2
Federal 39.6 71.3 64.1 80.0 -10.1
Provincial 53.4 75.1 103.0 40.6 37.2
Others (including BISP) 22.3 23.6 24.0 6.0 1.6
Net lending 4.8 -1.2 -0.3 -123.9 -77.2
Total 1170.6 1254.0 1261.6 7.1 0.6
Source: Ministry of Finance

Development expenditure
A breakup of Public Sector Development Program (PSDP) shows that growth in
overall development spending was led by a substantial increase in spending by
provincial governments. Provincial governments spent Rs 27.9 billion more
during Q1-FY17, while federal government spending declined by Rs 7.2 billion
during Q1-FY17 compared to the last year.

Detailed data on federal PSDP releases indicates that government is maintaining

focus on infrastructure and social development. Reflecting government priorities,
most of the spending was earmarked for infrastructure improvement (Rs 18.9
billion), higher education (Rs 4.3 billion), and health services (Rs 5.5 billion). The
sustained increase in development spending bodes well for long term growth
potential of the country.

13
While weighted average cut-off rates on T-bills declined by 102 bps in FY16, the interest
payments on the PIBs issued in 2013-14 are higher as the letter were issued at higher rates.

45
The State of Pakistan’s Economy

4.4 Provincial fiscal operations

As per FY17 budget, provinces are expected to show a combined surplus of Rs
339.0 billion during FY17; about 63 percent higher than the surplus posted in
FY16. In Q1-FY17, provinces posted a surplus of Rs 108.5 billion, around one
third of its FY17 target. This upbeat surplus was achieved with over 40 percent
increase in federal transfers to the provinces, complemented by containment of
current expenditures. In addition, provincial revenue collection also recorded an
uptick, mainly on the back of property taxes and continuing broadening of sales
tax on services.
Table 4.5: Provincial Fiscal Operations
billion Rupees
Punjab Sindh KPK Balochistan Total
Q1-FY17
A. Total revenue 242.4 134.6 66.9 55.8 499.7
Share in federal revenue 194.5 104.7 65.2 52.0 416.5
Taxes 36.0 14.3 1.4 1.3 53.0
Non-taxes 10.9 13.0 1.7 1.0 26.6
Federal loans and transfers 1.0 2.5 -1.4 1.5 3.7
B. Total expenditure 192.9 102.7 92.5 31.1 419.2
Current 139.4 78.7 68.3 29.7 316.2
Development 53.5 23.9 24.2 1.4 103.0
Gap (A-B) 49.4 31.9 -25.6 24.7 80.5
Financing (overall balance) -2.2 -38.8 -42.8 -24.9 -108.5
Q1-FY16
A. Total revenue 167.7 103.4 55.1 39.8 366.0
Share in federal revenue 134.2 72.9 46.3 35.5 288.9
Taxes 28.8 27.0 3.0 0.4 59.2
Non-taxes 7.0 1.4 5.2 1.2 14.9
Federal loans and transfers -2.3 2.0 0.6 2.6 3.0
B. Total expenditure 196.2 101.9 58.4 38.4 395.0
Current 145.8 88.3 50.0 35.8 319.9
Development 50.5 13.6 8.4 2.6 75.1
Gap (A-B) -28.5 1.5 -3.3 1.4 -29.0
Financing (overall balance) 31.3 -5.4 -13.0 -20.2 -7.4
Source: Ministry of Finance

Provinces are increasingly strengthening their revenue collection machineries,

especially for sales tax collection on services to uplift their revenue collection and
gradually decrease their reliance on federal government transfers. Accordingly, all
the provinces were able to improve their revenue position though the progress
seems marginal as their share in overall collection continues to be very small.

46
 First Quarterly Report for FY17

On expenditures side, provinces contained their current expenditures to create

more fiscal space for enhanced development spending, which recorded over 37
percent increase during Q1-FY17 as compared to last year (Table 4.5).

4.5 Public debt

Pakistan’s public debt stock increased by Rs 866.1 billion during Q1-FY17,
reaching Rs 20.5 trillion as of end-September 2016 (Table 4.6). This addition to
public debt in Q1-FY17 was significantly higher than the Rs 762.5 billion increase
in last year, and was mostly driven by government borrowing from domestic
sources. This increase in public debt reflects relatively higher fiscal deficit during
Q1-FY17, and the buildup of government deposits. Moreover, there was a marked
shift in the maturity profile of domestic debt (from long to short maturities) during
the quarter.
Table 4.6: Pakistan's Public Debt Profile
billion Rupees
Stock Flow
Jun-15 Sep-15 Jun-16 Sep-16 FY16 FY17
Public Debt 17380.2 18142.6 19676.7 20542.8 762.5 866.1
Domestic debt 12192.5 12714.6 13625.9 14385.8 522.1 759.8
Government external debt 4770.0 4952.7 5417.7 5515.0 182.7 97.3
Debt from the IMF 417.6 475.3 633.1 642.0 57.7 8.9
Source: State Bank of Pakistan

Domestic debt
Pakistan’s domestic debt expanded by Rs 759.8 billion in Q1-FY17, compared to
an increase of Rs 522.1 billion in the same period last year. Unlike the previous
year, when the onus of deficit financing fell on scheduled banks, a significant part
of the budget deficit in Q1-FY17 was financed through SBP borrowings (Table
4.7).14

In terms of maturity structure, the increase in the domestic debt during Q1-FY17
was mainly due to rise in the stock of floating debt, which more than offset a
decline in permanent debt during Q1-FY17. With an unprecedented increase of Rs
1.5 trillion in Q1-FY17, the share of short term debt has jumped to 45.1 percent by

14
Government borrowed Rs 567.8 billion (on cash basis) from SBP during Q1-FY17, which was
higher than the fiscal deficit in the quarter. Part of this borrowing was used to retire scheduled bank
borrowing.

47
The State of Pakistan’s Economy

end September 2016, from 36.7 Table 4.7: Change in Government Domestic Debt Stock (Q1)
percent three months ago.15 This billion Rupees
led to a shortening of maturity Net flows
profile of the domestic debt.16 FY16 FY17
Government domestic debt 522.1 759.8

Within short term borrowings, Institution- wise

A. Through banking system 393.5 697.0
MRTBs held by SBP were the
From scheduled banks 451.7 -214.9
main source of financing during
From SBP -58.2 911.9
Q1-FY17. Although the 128.4 62.8
B. Through non-bank debt
government kept additional C. Foreign currency instruments 0.1 0.0
budgetary borrowing from SBP Instrument- wise
at zero level till June 2016, it A. Permanent debt 90.8 -746.2
borrowed from SBP in July 2016 B. Floating debt 377.4 1480.0
to settle maturing amount of Rs C. Unfunded debt 53.7 26.0
1.2 trillion of PIBs (Figure D. Foreign currency Instruments 0.1 0.0
4.5).17 18 However, the Source: State Bank of Pakistan
government reduced its Figure 4.5: Outstanding Stock of Government Securities
reliance on SBP borrowing in PIBs MTBs MRTBs
later months of the quarter, 5.1
gradually shifting financing to 4.5
scheduled banks. PIBs
trillion rupees

4.0 retirement
viz-a-viz
Like the previous year, the 3.4 borrowing
commercial banks continued to through
lock in their funds in risk-free 2.9 MTBs

government securities. Within 2.3

government securities,
1.8
however, the bid pattern was
May-16
Mar-16
Sep-15

Feb-16

Sep-16
Jan-16

Aug-16
Aug-15

Nov-15
Jul-15

Jul-16
Apr-16

Jun-16
Dec-15
Oct-15

tilted more towards 3-month

and 6-month T-bills as market
Source: SBP
was not expecting the interest

15
Long term debt is the sum of permanent and unfunded debt, whereas the short term debt
constitutes only floating debt.
16
The monthly breakup of the data shows that the share of PIBs in domestic debt increased to 29.4
percent in October 2016 from 28.7 percent in July 2016.
17
In order to strengthen the secondary market, Fresh PIBs are generally issued once a year, and the
same issue is reopened in subsequent auctions of the PIBs. Coupon payments on PIBs are made at a
fixed rate on semi-annual basis. It implies that the maturities of 3-Year PIBs (Rs 1.2 trillion, with
fresh issue in July 2013) issued during FY14 fell in July 2016.
18
Total PIBs maturities stood at RS 1.4 trillion during Q1-FY17.

48
 First Quarterly Report for FY17

rate to fall further (Table 4.8).

Table 4.8: Auction Profile of Government Securities (Jul-Sep)
ratios
Another key factor for banks’
PIBs T-bills
preference for T-bills over PIBs FY16 FY17 FY16 FY17
was the decline in the term 4.0 3.5 1.2 2.0
Offer/Target
premium for PIBs. On average, Offer/Maturity 0.8 0.7 1.6 2.5
the term premium fell by around Accepted/Target 1.1 2.3 1.1 1.1
100 bps from December 2015 to Accepted/Offer 0.3 0.6 1.0 0.5
September 2016 (Figure 4.6). In Accepted/maturity 1.3 0.5 1.5 1.4
addition, the non-bank financial Source: State Bank of Pakistan
institutions also substituted
their investment in PIBs with Figure 4.6: Term Premium w.r.t 3-Month T-bills
3Y 5Y 10Y
T-bills.19 Resultantly, the
3.5
share of T-bills in total
3.0
domestic debt has jumped to
2.5
23.2 percent by end-
percent

September 2016 from 20.3 2.0

percent at end-June 2016. 1.5

1.0
Unfunded debt 0.5
The downward revision in 0.0
2-Jun-16
2-Dec-15

2-Mar-16
2-Sep-15

2-Feb-16

2-Sep-16
2-Jan-16
2-Aug-15

2-Nov-15

2-Aug-16
2-Jul-15

2-Jul-16
2-Apr-16
2-Oct-15

2-May-16
NSS rates continued to
dampen the net investment in
NSS instruments, which
recorded an increase of only Source: MUFAP
Rs 26.8 billion during Q1-
FY17, almost half the increase Table 4.9: Net Receipts under NSS Instruments (Jul-Sep)
billion rupees
seen in the same period last
FY14 FY15 FY16 FY17
year (Table 4.9). The DSC 1.7 3.2 0.6 4.3
composition of NSS indicates SSC 3.7 17.1 7.3 -0.7
that all major schemes, except RIC 5.0 14.6 -2.8 -9.7
for Defense Saving Certificate BSC 11.0 15.2 22.6 18.6
(DSC), witnessed decline in SSA 3.8 -2.4 19.7 8.3
Others 0.4 4.4 5.7 5.9
inflows during the quarter. The
Total 25.6 52.1 53.1 26.8
major contribution came from DSC: Defence Saving Certificates, SSC: Special Saving
Behbood Saving Certificate Certificate, RIC: Regular Income Certificate, BSC: Behbood
(BSC) that is being exempted Saving Certificates, SSA: Special Saving Accounts
Source: Central Directorate of National Savings (CDNS)

19
As on September 2016, Non-bank’s holding of PIBs fell by 7 percent year-on-year, whereas T-
bills holdings went up by 40 percent.

49
The State of Pakistan’s Economy

from withholding tax and Zakat. At the same time, Special Saving Scheme (SSC)
and Regular Income Certificate (RIC) witnessed net retirements during the period.
It is worth noting that share of NSS in domestic debt stock has been falling
persistently. This trend needs to be reversed in order to reduce government’s
reliance on borrowing from banks and external sources (Box 4.1).

Box 4.1: Resource Mobilization via NSS Instruments

The retail debt instruments are issued with the objective to diversify savings instruments and broaden
participation in secondary bond market, besides providing alternative source of financing deficit.
While issuing retail debt instruments, the developing economies take into account multiple
objectives of promotion of saving habit, mobilization of savings for financing economic
development, social security, etc.

Retail debt instruments are considered effective in enhancing savings in low or middle income
countries like Pakistan. It is particularly true in case of countries where the financial sector struggles
to reach out to remote areas. These instruments also help the government reduce its dependence on
external finance, which is prone to risks from movements in international currencies. However,
these are also criticized due to: (i) high cost involved in mobilization of savings from a large and
dispersed retail clients’ base; (ii) difficulty for financial sector to compete with the financial products
offered by the state, and; (iii) effect on liquidity in government bond market in case of increase in
share of non-tradable bonds.

Although retail debt instruments were

Figure 4.1.1: Trends in NSS
there even before the creation of
Pakistan, NSS were reinvigorated in Outstanding stock (rhs) NSS share in DD
60 3600
early 1990s with the objective to
broaden the funding base and 50 3000
encourage and mobilize savings.
Initially, NSS instruments attracted 40 2400 billion rupees
percent

retail investors as return was ad-hoc

and set higher than market rates. 30 1800
However, in 2000, the government
20 1200
linked the rate of return on NSS
instruments with rates on PIBs. 10 600
Market based rates on NSS, as result,
led to a decline in the NSS 0 0
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
FY14
FY16

investment over time. Since then, the

share of NSS has been falling
consistently (Figure 4.1.1). Source: CDNS
Currently, it stands at 20 percent of
the outstanding domestic debt stock.

How to increase savings through NSS?

In Pakistan, a major chunk of the deficit is financed through borrowing from the commercial banks.
Government’s increased reliance on bank borrowing, combined with banks’ preference to invest in
government securities, affects banks’ lending to the private sector. This warrants efforts to revive
the alternate funding through NSS.

50
 First Quarterly Report for FY17

Below are some recommendations to increase NSS inflows through introduction of new retail
instruments as well as changes in the existing ones:

Expanding distribution network: Distribution is an important factor in mobilizing funds through

retail debt issuing activity. In areas without national saving centers and/or banks, the NSS
instruments could be offered to general public through retail shops offering some money transfer
facility or through better marketing and optimally utilizing the existing setup of Pakistan Post
Offices.

Allowing flexibility on premature withdrawal: Anecdotal evidence suggests that some retail savers
do not want to lock in their savings for a longer period, and hold cash to meet expenses related to
children’s education or marriage, etc. Therefore, offering an option to withdraw investment without
much cost in terms of forgone interest – that is, offering return on pro-rata basis – could encourage
that segment to invest in NSS instruments and withdraw when the need arises.

Islamic bonds (floating rate/asset based): A large segment of the population in Pakistan does not
like to keep their savings in bank accounts or invest in NSS instruments to avoid interest.
Introduction of retail products on the lines of Ijara Sukuk might attract such small savers who prefer
to invest in instruments based on the principles of Islamic finance.

Electronic retail system: The objective to design electronic retail debt instruments is to reach the
investors who consider it cumbersome to go to a bank or national saving centre. Although the
individuals in Pakistan have direct access to primary market of government securities through
Investor Portfolio Services Account, no such facility is available for non-tradable retail debt
instruments. The introduction of electronic retail system to subscribe retail debt instruments or
withdraw their investment would not only attract more retail investors but also could make it a
relatively cost-efficient option.

Tax exemption on return for a minimum investment: The return/profit on most NSS instruments
are subject to withholding taxes, except for BSC and PBA. To attract more investment from small
savers, return on some minimum level of investment can be exempted from the withholding tax.

Inflation-indexed bonds: In countries where inflation is relatively high and volatile, people would
want to protect the purchasing power of their assets. In inflation-indexed bonds, both the capital and
coupon are linked to the consumer price inflation. Many countries, such as US, UK, Japan and
South Africa, offer inflation indexed retail bonds to the savers. However, the disadvantage to
government for issuing such bonds is the increase in cost with the increase in inflation.

Exchange rate indexed bonds: Some investors are more concerned about the value of their assets in
terms of foreign currency. To make debt instruments attractive to such investors, creating a linkage
to an international currency might be an alternate option. Such bonds are generally denominated in
domestic currency but the coupon and capital amount are linked to an international currency. Thus,
the government does not need to have foreign exchange to serve this type of debt.
Bibliography:
1. Blommestein, Hans J. and Horman, G. (2007). “Retail instruments in public funding strategies,”
ResearchGate, Financial Market Trends, 2007(1), 177-189:
https://www.researchgate.net/publication/227351499.
2. Ricardo, Giucci, Robert Kirchner, and Cyrus de la Rubia (2009). “How to develop a public debt
market for retail investors,” Institute of Economic Research and Policy Consulting, Policy
Paper Series [PP/02/2009].

51
The State of Pakistan’s Economy

3. Thedéen, E. (2004). “Retail borrowing: an important part of the national debt,” Swedish
National Debt Office.
4. The Euromoney (2007). “International Debt Capital Markets Handbook 2007”

External debt20 Figure 4.7: Stock of Long Term Commercial Loans

External debt & liabilities
1,600
recorded an increase of US$
1.0 billion during the quarter,
1,200
reaching US$ 62.4 billion by
million US$
end-September 2016.
Although the debt repayment 800

to IFIs increased significantly

during this period, the debt 400
stock rose mainly on account
of US$ 701 million long term 0

Jun 2016
Dec 2015

Mar 2016
Sep 2015

Sep 2016
commercial loans and US$
312 million from bilateral
creditors (Table 4.10).
Source: Economic Affairs Division

On a positive note, the Table 4.10: External Debt and Liabilities

government made a net billion US$
retirement of US$ 315 million Jun-16 Sep-16 Change
short term commercial loans, A. Government debt 51.7 52.7 0.96
switching them with more long Paris club 12.7 12.8 0.11
term commercial loans from Multilateral 26.4 26.2 -0.21
foreign banks to benefit from Other bilateral 4.5 4.8 0.31
Commercial loans (LT) 0.88 1.6 0.70
prevailing low global interest
IDB(ST) 1.1 1.4 0.27
rate environment (Figure 4.7). Commercial loans(ST) 0.58 0.26 -0.31
Moreover, it reduces the rollover B. Debt from IMF 6.0 6.1 0.88
risk. C. External Liabilities 3.6 3.6 0
Total 61.4 62.4 1.0
The data of gross disbursement Source: State Bank of Pakistan

of external loans shows that the country received an amount of US$ 1.8 billion in
Q1-FY17, compared to only US$ 1.6 billion last year (Table 4.11).21 Among
bilateral creditors, the major increase came from CPEC related disbursements. At
the same time, the gross inflows from multilateral donors recorded marginal

20
This section focuses on debt and liabilities of the public sector only. As per FRDL, the external
debt of the public sector includes government debt and debt from IMF. The detailed information on
external debt is available on SBP website: http://www.sbp.org.pk/ecodata/pakdebt.pdf
21
This excludes inflows from IMF during the quarter.

52
 First Quarterly Report for FY17

increase during the quarter. However, heavy repayment to these donors led to
overall net retirement during the period.

Table 4.11: External Loan Inflows during Jul-Sep

US$ million
FY16 FY17
Gross Net Gross
Outflow* Outflow* Net Inflows
Inflow Inflows Inflow
ADB 83.2 190.5 -107.3 115.8 236.8 -121.1
IBRD 33.1 75.2 -42.1 16.9 70.1 -53.2
IDA 30.1 111.9 -81.8 39.3 135.7 -96.4
IDB (ST) 51.7 12.0 39.7 212.4 54.2 158.2
China 255.6 117.6 138.0 404.8 125.6 279.1
Commercial Banks 513.3 207.7 305.5 900.0 276.0 624.0
Bond 499.4 29.6 469.7 0.0 11.8 -11.8
Others 226.3 263.3 -71.8 122.4 106.6 15.7
Total 1692.7 1008.0 649.9 1811.4 1016.9 794.6
*: Principal plus interest payments.
Source: Economic Affairs Division

53