The week in focus
The cash crunch and inter-corporate debt continues to haunt the government.
The cash crunch and inter-corporate debt has continued to haunt the government, which sees its problems worsening by a freeze on power tariff increase and withdrawal of the fuel price increase.
Since taking the reins in the first half of 2008, the present government has been encountering a shortage of funds but got some reprieve in November 2008 when the International Monetary Fund (IMF) approved a bailout package of $7.6 billion, later enhanced to $11.3 billion.
However, the IMF has stopped the release of the remaining two loan tranches of $3.4 billion since May last year because the government was slack in carrying out major reforms in the tax machinery and energy sector and failed to impose the reformed general sales tax (RGST).
The shortage of funds has resulted in a ballooning of the inter-corporate debt as departments have withheld payment of electricity bills to state-run power generation and distribution companies, which in turn have stopped payments to oil marketing companies, particularly Pakistan State Oil (PSO). As a result, the oil marketers have halted payments to the refineries, which has dented their efficiency and ability to pay to international suppliers.
According to an analyst, inter-corporate debt now stands at a net Rs150 billion and if no remedial measures are taken, it will shoot up to Rs250 billion by the end-June. There remains the big question mark about how the government will keep running its affairs when the massive increase of around nine per cent in petroleum product prices has been withdrawn and a freeze has reportedly been placed on increasing power tariffs – which were to be enhanced two per cent every month.
Neither will the current fiscal’s revenue collection target of Rs1,604 billion – if met – provide enough funds to bridge the fiscal deficit, which may end up around 5.5 to 6.5 per cent of gross domestic product (GDP) at the end of the year, compared with the target of 4.7 per cent.
Plug leakages
Economist AB Shahid says that the Federal Board of Revenue (FBR) is not falling behind a great deal as far as meeting the revenue target is concerned but corruption in government departments (particularly the tax machinery) and loss-making public sector companies are swallowing up a huge amount of money. “The government is not doing its job. Proper accountability of government departments must be ensured to check the wastage of money.”
Shahid said the government’s failure to pay power bills is a major hurdle in the way of clearing the inter-corporate debt, adding that power companies are trying to control theft to make up for losses to some extent.
No threat to credit ratings
BMA Capital’s Head of Equity Research Hamad Aslam said that despite the cash crunch the country faces no major risk to its currency ratings as the rupee has remained quite stable over the last one year. However, the widening fiscal deficit and weak economic growth may indirectly impact ratings.
In the case of commercial banks, he said, Moody’s (the ratings agency) is likely to upgrade ratings in the next review, after they had been downgrading earlier, as the financial position of banks is quite satisfactory.
“Before the end of this fiscal, the government may receive a loan tranche of $1.2 billion from the IMF, but the fate of this installment is not known,” he said.
Regarding heavy borrowing by the government from the State Bank, Aslam said that the printing of money, which fuels inflation, will prompt the central bank to increase the discount rate by 50 basis points to 14.5 per cent in the monetary policy review at the end of January. “There is a possibility of another half a percentage point hike in March as well.”
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, January 17th, 2011.
Since taking the reins in the first half of 2008, the present government has been encountering a shortage of funds but got some reprieve in November 2008 when the International Monetary Fund (IMF) approved a bailout package of $7.6 billion, later enhanced to $11.3 billion.
However, the IMF has stopped the release of the remaining two loan tranches of $3.4 billion since May last year because the government was slack in carrying out major reforms in the tax machinery and energy sector and failed to impose the reformed general sales tax (RGST).
The shortage of funds has resulted in a ballooning of the inter-corporate debt as departments have withheld payment of electricity bills to state-run power generation and distribution companies, which in turn have stopped payments to oil marketing companies, particularly Pakistan State Oil (PSO). As a result, the oil marketers have halted payments to the refineries, which has dented their efficiency and ability to pay to international suppliers.
According to an analyst, inter-corporate debt now stands at a net Rs150 billion and if no remedial measures are taken, it will shoot up to Rs250 billion by the end-June. There remains the big question mark about how the government will keep running its affairs when the massive increase of around nine per cent in petroleum product prices has been withdrawn and a freeze has reportedly been placed on increasing power tariffs – which were to be enhanced two per cent every month.
Neither will the current fiscal’s revenue collection target of Rs1,604 billion – if met – provide enough funds to bridge the fiscal deficit, which may end up around 5.5 to 6.5 per cent of gross domestic product (GDP) at the end of the year, compared with the target of 4.7 per cent.
Plug leakages
Economist AB Shahid says that the Federal Board of Revenue (FBR) is not falling behind a great deal as far as meeting the revenue target is concerned but corruption in government departments (particularly the tax machinery) and loss-making public sector companies are swallowing up a huge amount of money. “The government is not doing its job. Proper accountability of government departments must be ensured to check the wastage of money.”
Shahid said the government’s failure to pay power bills is a major hurdle in the way of clearing the inter-corporate debt, adding that power companies are trying to control theft to make up for losses to some extent.
No threat to credit ratings
BMA Capital’s Head of Equity Research Hamad Aslam said that despite the cash crunch the country faces no major risk to its currency ratings as the rupee has remained quite stable over the last one year. However, the widening fiscal deficit and weak economic growth may indirectly impact ratings.
In the case of commercial banks, he said, Moody’s (the ratings agency) is likely to upgrade ratings in the next review, after they had been downgrading earlier, as the financial position of banks is quite satisfactory.
“Before the end of this fiscal, the government may receive a loan tranche of $1.2 billion from the IMF, but the fate of this installment is not known,” he said.
Regarding heavy borrowing by the government from the State Bank, Aslam said that the printing of money, which fuels inflation, will prompt the central bank to increase the discount rate by 50 basis points to 14.5 per cent in the monetary policy review at the end of January. “There is a possibility of another half a percentage point hike in March as well.”
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, January 17th, 2011.