Charter of the Economy Table 12.3 above has important negative implications. A basic element of optimal debt management policy is to avoid the‘the lock-in’ effect of long-term debt when the rate of inflation is high and consequently yields are also high. The preference should be for short term debt at this time. Of course, there are limits to such a policy as maturity of large amounts of short-term debt could put pressure on the market and push up interest rates. The opposite policy was followed in the period, 2013-14 to 2017-18, when the rate of inflation was exceptionally low at below 4 percent. Bulk of the incremental borrowing, almost 78 percent was in the form of Market Treasury Bills. There was similarly a deviation from a prudent debt management policy in 2018-19 and 2019-20. Interest rates were at a peak during these two years with relatively high inflation. For inexplicable reasons, more than 100 percent of the net borrowing was in the form of PIBs and there was simultaneously a big retirement of short-term debt. The opposite policy should have been followed. The result is that the cost of servicing domestic debt increased by as much as 38 percent in 2018-19 and 27 percent in 2019-20. 12.4. Determinants of the rise in Government Debt There are three factors which contribute to higher debt as follows: i) Interest payments on the outstanding stock of debt ii) Primary deficit in the Budget iii) Increase in rupee value of outstanding external debt due to the depreciation of the rupee. The contribution of these factors to the increase in the value of Government debt is given in Table 12.4. As expected, interest payments due are the largest source of increase in debt liabilities. Between 2011-12 and 2015-16 there was limited depreciation of the rupee and the contribution to the buildup of debt was small. This changed in the last two years. Table 12.4: Contributory Factors to the Increase in Government Debt Due to Total Increase Interest Payments Primary Deficit 2008-09 to 2011-12 2011-12 to 2015-16 2015-16 to 2019-20 Source: SBP 4690 (100.0) 7041 (100.0) 16064 (100.0) 2229 (47.5) 4706 (66.8) 7558 (47.0) 1371 (29.2) 1866 (26.5) 3766 (23.4) (Rs in Billion) Due to Increase in External Debt because of Rupee Depreciation 1090 (23.3) 469 (6.7) 4740 (29.6) 124