PSEs' performance

Financial position of the loss-making public sector enterprises (PSEs) continues to deteriorate and they have to rely heavily on the banking system for their financial requirements. According to a latest report of the State Bank, PSEs have borrowed as much as Rs 115 billion during the first seven months of the current financial year as compared to Rs 79.8 billion in the corresponding period of last year showing an increase of about 45 percent. This amount was in addition to Rs 368 billion borrowed by the government for budgetary support during the same period. The loss-making PSEs accumulated a total debt of Rs 822.8 billion by the close of June, 2017, including the debts of Rs 109 billion in FY16 and Rs 255 billion during FY17. Almost all the important PSEs are suffering losses. PIA accumulated losses of over Rs 146 billion during the last four years, forcing the airline to discontinue some of the important routes. Pakistan Railways suffered a loss of over Rs 26 billion in 2016-17, even after recent improvement in services. Similarly, PSM has been incurring monthly losses of Rs 509 million despite injection of billions of rupees by the government for clearing of its liabilities, restructuring and tax incentives on import of raw materials.
It may be mentioned here that credit flows to the PSEs are not exactly equal to their losses as PSEs could also receive financial assistance from the government or they could sell-off some of their assets to meet their losses. Nonetheless, the trend during the current year is grave and the credit flows to the PSEs will probably be much higher this year, as demonstrated by a surge of 45 percent so far. There are of course inherent risks if such a trend continues. For instance, since most of the credit advanced to PSEs is in the nature of contingent liabilities of the government, the government may have to pay the borrowed amount in case the PSEs continue to incur losses. This will be a big jolt to the government finances that are already weak and the government is unable to carry the added burden. Secondly, increasing credit to the PSEs does not only crowd out private sector credit but could undermine the viability of the financial system whereas we know that a well-structured and efficient financial system is a pre-requisite for economic growth in a modern economy. Banks all over the world mobilise and pool savings from a large number of depositors and place them at the disposal of entrepreneurs for investment. Obviously, the quality of this function can influence saving and investment decisions and hence economic growth. The reasons for the deterioration of the health of the financial institutions could be increasing inefficiencies, corruption, overstaffing, etc., but a way must be found out to get out of this dismal situation. This can only be done through a major restructuring or privatisation of PSEs but this does not seem possible due to a campaign launched by the opposition parties and the trade unions if such a route was adopted. The present PML(N) government has failed to privatise PIA and PSM because of lack of political will. The exercise may also meet the same fate if the next government tries to clear the deck. The only way to move forward would be to evolve a consensus between the government, the opposition parties and the labour unions to derive a concrete strategy in order to achieve success.