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Finance Minister Shaukat Tarin in his budget speech stated that "although losses of PIA and Steel Mills have been reduced through better management, they still need financial support from the federal government. Budget allocations of 20 billion rupees for PIA and 16 billion rupees for Steel Mills have been made."

Critics would no doubt challenge his claim that losses have reduced due to "better management": PIA's international flight operations remain impacted in the aftermath of Federal Minister Ghulam Sarwar accusing pilots of not possessing the requisite qualifications on the floor of the house, a claim not backed by investigation at the time, leading to withdrawal of landing rights to the airline with reduced operational costs; and Steel Mills have remained non-operational since 2015. Add the appallingly run power sector reliant on loans backed by sovereign guarantees (with circular debt of over 2.3 trillion rupees today which before 2019-20 was not even acknowledged as debt in the budget) and has a better idea of the country's actual indebtedness.

Be that as it may, these two decades long poorly performing entities, together with Pakistan Railways, have formed a triumvirate of what is generally referred to as the three white elephants draining the country's treasury. Administration after administration, including the incumbent, has been supporting them not only through large direct budget injections implying lower outlay for social and physical infrastructure development, but also through extending sovereign guarantees on their behalf.

Thus while 36 billion rupees earmarked for the two entities in the budget 2021-22 may not appear to be a significant amount in a 8487 billion rupee budget for 2021-22 - 0.42 percent - yet the impact of government support is substantially more given the sovereign guarantees on loans acquired by the white elephants whose interest charges are passed onto the end consumers.

The stock of sovereign guarantees allowed under the 2005 Fiscal Responsibility and Debt Limitation Act was 2 percent of Gross Domestic Product (GDP). By 2020-21 the government had surpassed this limit to 6 percent of GDP. And on 22 May 2021 the federal government introduced "The Fiscal Responsibility and Debt Limitation (Amendment) Bill, 2021" in the National Assembly proposing to raise the limit on the stock of government guarantees to 10 percent of GDP - an unprecedented rise of 400 percent.

In total terms with GDP budgeted for 2020-21 at 47.709 trillion rupees (assuming that the 5 percent growth rate is achieved) 2 percent would have accounted for 954 billion rupees, 6 percent would constitute a total of 2.86 trillion rupees, while 10 percent would be 4.77 trillion rupees. Ironically, in spite of raising the limit on stock of guarantees to 10 percent the budget for the current year states that "the government is committed to maintaining or reducing this exposure in the upcoming fiscal year."

The Economic Survey 2020-21 released a day before the budget maintains that contingent liabilities primarily constitute guarantees issued on behalf of Public Sector Enterprises (PSEs) and "should be examined in the same manner as a proposal for a loan, taking into account, inter alia, the credit worthiness of the borrower, the amount and risks sought to be covered by a sovereign guarantee, the terms of the borrowing, justification and public purposes to be served possibilities that various commitments will become due and possible costs of such liabilities."

Contingent liabilities began to be part of the budget documents from 2019 subsequent to the passage of the Finance Act by the national assembly that received assent from the President on 30 June 2019 wherein the section on Annual Budget Statement para 4 notes that: "the Annual Budget Statement shall also contain statement of contingent liabilities of the Federal Government; and statement of fiscal risks." This inclusion may have been an attempt by international donor agencies to ensure a focus on contingent liabilities due to their impact on the country's indebtedness.

Data also revealed that 83 percent of government guarantees were earmarked for the power sector and here too there is an additional price to pay for the consumers in terms of interest payments in-built into the tariffs. Aviation sector received 8 percent of total guarantees. Details were provided in the IMF second to fifth review report dated April 2021: "the authorities have recognized parts of contingent liabilities in the context of the circular debt stock in the power sector held by the Central power purchasing Authority worth about 1 percent of GDP (part held by Power Holding Private Limited is already accounted for under public guarantees). Remaining contingent liabilities from CPPA arrears (amounting to around 1.6 percent of GDP) as well as contingent liabilities from other loss making state owned entities (about 2 percent of GDP) are accounted for in this Debt Sustainability Analysis through a stress test to debt dynamics consisting of a "non-financial sector contingent liability stock."

The impact of financial and non-financial contingent liability is less extreme on debt dynamics than the real interest rate shock, so noted the Fund in its report.

The appallingly run energy sector circular debt estimated at 2.327 trillion rupees as of 30 June 2021. Out of this amount, the budget notes that from July 2020 to March 2021, the government issued fresh/rollover guarantees/letters of comfort aggregating to 83 billion rupees (0.2 percent of GDP) with total executed guarantees of 2756 billion rupees while outstanding stock was 2410 billion rupees by end March 2021.

The underlying assumption with respect to the base line scenario by the Fund for 2022 is as follows: (i) real GDP growth of 4 percent (5 percent budgeted); (ii) inflation 9.4 percent (8.02 percent budgeted); (iii) primary balance 0.4 percent (0.6 percent budgeted); (iv) effective interest rate of 6.9 percent though it is unclear if monetary policy tightening would be allowed if growth remains a priority and of course; and (v) in the event that the finance minister is unable to demonstrate to the Fund that his alternate reforms have begun to pay dividends borrowing costs would rise.

Total outstanding government guarantees are cited at 2410 billion rupees by end

March 2021 with 1613 billion rupees, 67 percent, noted as domestic and the remaining external. External guarantees of 5213 million dollars are noted with the exchange rate at 153, underestimated given the rate is nearing 160 rupees today hence total outstanding external guarantees are much higher than stated in the budget in rupee terms.

To conclude, the government by raising the sovereign guarantees limit to 10 percent (perhaps to take account of projects under the China Pakistan Economic Corridor) must surely be aware of its impact on debt sustainability and inflation - elements that would not only be of serious concern to international donor agencies (including the International Monetary Fund) but also to the general public.

Copyright Business Recorder, 2021


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