Government Plans Rs. 6,046 Billion Domestic Borrowing and Long-Term Debt Shift

Understanding the New Domestic Borrowing Strategy

The government intends to finance around 75 percent of the federal fiscal deficit through domestic borrowing, with net domestic borrowing projected at Rs. 6,046 billion against a federal fiscal deficit of Rs. 7,020 billion. This financial blueprint outlines a calculated approach to managing national liabilities while addressing structural vulnerabilities in the public treasury. By shifting attention toward domestic sources, the administration aims to anchor its fiscal framework against external shocks.

Under its borrowing strategy, the government intends to reduce reliance on short term debt and shift toward financing instruments with longer tenors to manage debt servicing and refinancing risks. Short-term borrowing historically exposes the national budget to rapid interest rate fluctuations and frequent rollover pressures. Extending the maturity profile creates a buffer for the fiscal machinery, allowing for more predictable budget allocations.

The net retirement of short term debt, particularly Treasury Bills, is planned at Rs. 2,592 billion, with maturing liabilities expected to be rolled over into instruments carrying longer tenors. Treasury Bills have long served as a primary instrument for immediate cash management, but heavy reliance on them creates continuous refinancing hurdles. Retiring a substantial amount of these short-term obligations marks a departure from past borrowing habits.

Expanding Pakistan Investment Bonds and Fixed Rate Issuances

The government also plans to increase the issuance of Pakistan Investment Bonds, with net issuance projected at around Rs. 4,580 billion. Pakistan Investment Bonds provide medium to long-term debt securities that help stabilize the government debt portfolio by locking in rates for extended periods. This expansion aligns with the broader objective of moving away from weekly or monthly debt auctions.

Fixed rate bonds are expected to account for more than 50 percent of new issuances. Fixed-rate instruments offer certainty in debt servicing costs, protecting the national budget if market interest rates rise unexpectedly. The government will also cap floating rate debt, with the 10 year Sukuk Variable Rental Rate instrument expected to remain the only floating rate instrument.

Capping floating rate exposure limits the vulnerability of public finances to monetary policy tightening. When interest rates climb, floating rate debt immediately increases the burden on the national exchequer. By prioritizing fixed rates, the administration seeks greater predictability in its fiscal planning.

Sukuk Expansion and Liability Management Operations

Under its Sukuk expansion strategy, the government has set a gross issuance target of approximately Rs. 6,600 billion. Islamic bonds have gained traction as a viable mechanism to tap liquidity from both domestic and international investors seeking sharia-compliant assets. The plan includes the introduction of new hybrid Sukuk instruments as well as three month and six month Sukuk.

The borrowing strategy also envisages continued liability management operations, including debt buybacks and switches, to reduce refinancing risks. Liability management allows the treasury to proactively manage its existing debt stock by exchanging old securities for new ones before they mature. This prevents bunching of debt repayments in specific fiscal quarters.

Meanwhile, the government plans to restructure National Savings schemes through market based pricing and digitalization, while retail investor access will be expanded through InvestPak and digital wallets. National Savings schemes have traditionally attracted individual savers, and aligning their rates with market benchmarks ensures sustainability. Digitalization through InvestPak opens avenues for wider public participation in government securities.

External Borrowing Strategy and International Capital Markets

On the external financing front, the government has projected a modest net inflow of $2.8 billion, equivalent to Rs. 813 billion, for deficit financing. Balancing external obligations requires careful coordination between foreign currency earnings and debt repayment schedules. Multilateral development partners are expected to remain the primary source of external financing, with a projected net inflow of $1.58 billion. External repayments are projected at Rs. 17 trillion.

The government also plans to return to international capital markets through the issuance of more than $2 billion in Eurobonds and international Sukuk. The strategy notes that $3 billion worth of Eurobonds has already been issued. Accessing global debt markets helps diversify the investor base and brings in vital foreign exchange reserves.

The government intends to replace shorter external debt with longer dated financing to improve the country's debt maturity profile. As part of its efforts to diversify financing sources, Pakistan will also explore Panda Bonds and initiatives to channel foreign portfolio investment into domestic bonds. Exploring new currency markets and instruments like Panda Bonds reflects a strategy to reduce dependency on traditional Western financial hubs.