Punjab's debt drops by Rs24.8bn

Punjab’s total government debt decreased by 24.8 billion rupees during the second quarter of the fiscal year (FY) 2024-25, marking a 1.5 percent decline. As per reports, this reduction occurred as exchange rate movements favoured the rupee and resulted in an overall improvement in the province’s debt situation.

By the end of December 2024, Punjab’s debt stock stood at a controlled 1,654 billion rupees — a significant improvement from the staggering 1,678.8 billion rupees recorded in September. Report data reveals that the bulk of this amount came from external loans, totalling a colossal 1,652.5 billion rupees, while domestic debt remained minimal at just 1.5 billion rupees.

Punjab’s debt-to-GDP ratio during this period witnessed a slight improvement, dropping from 2.49 percent in the previous quarter to the current value of 2.46 percent. According to reports, this decline was driven by foreign exchange gains amounting to a significant 12.1 billion rupees.

These gains resulted from the depreciation of the Special Drawing Rights (SDR), the Chinese Yuan, and the Japanese Yen against the rupee. For reference, the SDR is a basket of five currencies.

In addition, provincial authorities managed to lower Punjab’s net borrowing by a respectable 12.7 billion rupees, thereby reducing its debt burden. This could be a result of the austerity measures prescribed by the International Monetary Fund (IMF).

However, these figures may be misleading, as the Government of Punjab is liable to cover loans taken by certain government entities that are not included in official debt records. These guarantees were reportedly worth a whopping 103 billion rupees, of which a large portion was reserved for the purchase of wheat under the federally supported Cash Credit Limit (CCL) program.

Foreign currency loans make up the largest portion of the province’s debts, exposing the province to exchange risk. The ‘risk’ can impact the payable loan values both positively or negatively depending on changes in the rupee’s value. For instance, an appreciating rupee is beneficial for Punjab because provincial loans are denominated in foreign currencies.

71 percent of Punjab’s debts were USD-denominated, followed by SDR-denominated (21 percent), Japanese Yen (five percent), Chinese Yuan (two percent), and one in all the other currencies. This structure exposes the province to exchange risk, as a potential depreciation of the rupee can add value to its liabilities.

However, reports outline that fixed interest covers 73 percent of the overall debt stock of the province, which offers some protection against exchange rate fluctuations. Nonetheless, Punjab’s preference to receive credit denominated in foreign currencies guarantees that exchange volatility will remain a serious issue looming over its fiscal stability.