ISLAMABAD: Pakistan has committed to the International Monetary Fund (IMF) that it would complete the process of privatization of two RLNG power plants and two small banks by June 2022 with proceeds to be channeled to debt reduction and poverty programs.
The Fund in its Staff Report prepared for the Executive Board’s consideration on February 2, 2022, disclosed that Pakistan authorities have committed that it will continue to implement several comprehensive structural reforms in an effort to attract investment and support growth and job creation notably focus on policies designed to reform state-owned enterprises (SOEs), improve the overall business environment; and enhance governance.
The government pledged to improve SOEs’ governance, transparency, and efficiency as well as limiting their fiscal risks.
To advance the privatization of two small public banks the government pledged to constitute the board of one bank by End-December 2021 and aim to complete the privatization process by end-June 2022; and complete the 2018-2020 outstanding annual audits of the other bank by the end-June 2022 and the 2021 annual audit by end-August 2022, with the aim to complete the privatization process by end-December 2022. In September 2021, the ECC approved a bailout for Pakistan International Airways (PIA) amounting to PRs 44 billion (of which, half is in cash and the remainder in sovereign guarantees) after Covid-related restrictions contributed to a deterioration of PIA’s already difficult financial situation.
The report further noted that Pakistan’s SOE sector is saddled by poor performance and weak corporate governance, posing significant fiscal risks.
Non-financial commercial SOEs held total assets amounting to 44 percent of GDP in 2019 (up from 31 percent of GDP in 2015), but only provided about 0.7 percent of total formal employment.
Based on a comprehensive triage report published by the Ministry of Finance in 2021, which provides a snapshot of the federal-level SOE landscape as of the end-fiscal year 2019, there are 213 SOEs, of which only 85 are commercial operations (18 financial and 67 non-financial).
The overall revenues of all non-financial commercial SOEs in the fiscal year 2019 were about Rs 5 trillion (14 percent of GDP). Despite their important role in the economy, the financial performance of many SOEs is weak, with one-third are consistently generating losses.
The IMF called on the authorities to accelerate the legal, regulatory, and policy framework update of the SOE sector. A key element remains the parliamentary approval of the SOE law in line with IMF recommendations. It aims to: (i) define a rationale for state ownership; (ii) ensure commercially sound SOE operations; and (iii) regulate oversight and ownership arrangements.
Additional steps include defining a new ownership policy, amending several SOEs’ Acts, and operationalising a central monitoring unit within the Ministry of Finance. To further foster efficiency and reduce fiscal risks, the Fund advised to follow through with a gradual reduction of the footprint of the state in the economy, with only a small number of SOEs considered strategic under state ownership (as determined in the triage finalized with World Bank TA in March 2021) which included finalizing the divestment of two LNG-based power plants and two small public banks.
The Fund insisted that regular and timely audits of key SOEs remain crucial, including of the Utility Stores Corporation.
Copyright Business Recorder, 2022