Public Finance

In Pakistan’s fragile fiscal ecosystem, the State Bank of Pakistan (SBP) plays a dual role as monetary authority and debt manager, navigating the tightrope between stabilizing the economy and containing public debt risks. With public debt soaring to ₨64.5 trillion (85% of GDP) in FY2023-24 and debt servicing consuming 57% of federal revenue, the SBP’s policies on interest rates, foreign exchange reserves, and debt structuring directly influence fiscal sustainability. While the central bank’s autonomy under the 2021 SBP Amendment Act strengthens its mandate, global headwinds and domestic imbalances test its capacity to balance growth with debt stability.

Monetary Policy and the Debt Servicing Trap

The SBP’s interest rate decisions critically impact debt servicing costs, particularly for Pakistan’s domestic debt, which constitutes 63% of total public debt. Since 2022, aggressive rate hikes—peaking at 22% in 2023—to combat inflation (38% YoY in May 2023) escalated interest payments to ₨5.2 trillion annually, crowding out development spending. However, easing rates prematurely risks currency depreciation, which exacerbates external debt burdens.

Impact of SBP Rate Hikes (2022–2024)

Forex Reserves and External Debt Vulnerabilities

With external debt at $97.6 billion (34% of GDP), the SBP’s forex management is pivotal. Reserves plummeted to $3.1 billion in January 2023—barely covering three weeks of imports—before IMF inflows boosted them to $9.4 billion by April 2024. The SBP’s strategies to mitigate external risks include:

• Swap Arrangements: Securing $4.2 billion in Chinese currency swaps to meet USD debt obligations.
• Diaspora Bonds: Raising $1.5 billion via Roshan Digital Accounts for non-resident Pakistanis.
• Import Controls: Prioritizing essential goods to curb dollar outflows, though this stifles industrial growth.

These measures, however, offer temporary relief. A 10% rupee depreciation in 2023-24 added ₨830 billion to external debt servicing, underscoring the limits of reactive forex management.

Debt Structuring Innovations and Pitfalls

The SBP has spearheaded efforts to elongate debt maturities and diversify instruments:

• Long-Term Bonds: Issuing 20-year PIBs in 2023 to reduce rollover risks, attracting ₨1.8 trillion.
• Shariah-Compliant Tools: Expanding Sukuk issuances to tap Islamic finance markets, covering 18% of domestic borrowing.
• FX-Linked Securities: Introducing USD-denominated bonds for exporters, though uptake remains muted at $220 million.

Yet, structural flaws persist. Over 42% of domestic debt remains short-term (T-bills), necessitating frequent refinancing. Banks’ dominance as buyers (holding 72% of PIBs) perpetuates crowding-out effects, with private sector credit growth stagnating at 12%.

Reconciling Autonomy with Fiscal Realities

The SBP’s enhanced autonomy shields it from political pressures but complicates coordination with the Finance Division. For instance, the 2023 dispute over debt monetization—where the SBP resisted printing ₨450 billion for subsidies—highlighted tensions between monetary restraint and fiscal populism. Similarly, while the SBP advocates reducing energy subsidies (₨1.1 trillion in FY2024), structural reforms lag due to electoral cycles.

Toward a Sustainable Debt Pathway

Breaking the debt spiral demands synergistic reforms:

1. Debt-Liability Management: Introduce a centralized Public Debt Management Office (PDMO) co-led by SBP and Finance Division, as proposed under the 2024 IMF SBA.
2. Derisking External Debt: Accelerate currency swaps with trade partners and renegotiate high-cost bilateral loans.
3. Monetary-Fiscal Synergy: Align rate policies with medium-term debt sustainability frameworks, delinking from short-term inflation targeting.

The SBP’s role transcends conventional central banking in Pakistan’s debt-ridden context. Its ability to innovate within constraints—while resisting quick fixes—will determine whether debt becomes a managed liability or a perpetual crisis.

This article was published on PublicFinance.pk.