Stock of ‘sovereign guarantees’ has increased to a record Rs937b

Finance ministry issues assurances to cover debt of loss-making state-owned entities

ISLAMABAD: In another embarrassing outcome, the stock of outstanding sovereign guarantees the finance ministry has issued to help loss-making Public Sector Enterprises (PSEs) take debt has increased to a record Rs937 billion.

As of June 2017, the stock of outstanding guarantees stood at Rs936.9 billion, according to the finance ministry. As much as 62% of the total stockpile or Rs586 billion worth of sovereign guarantee was issued in the past one year alone after the PML-N government miserably failed to undertake any sort of reforms within these companies.

The stock increased by 50% during the past four years, as at the end of the Pakistan Peoples Party government the total outstanding sovereign guarantees stood at Rs626 billion.

The accumulation of debt obtained by PSEs against these sovereign guarantees highlights the PML-N government’s inability to reform government-owned entities during the four years of its rule. The PSEs’ reforms were on top of the PML-N’s agenda and another requirement of the International Monetary Fund’s (IMF) bailout package.

Former prime minister Nawaz Sharif had vowed in his first cabinet meeting that his government would turn these enterprises around or he would not have a right to govern the country.

These obligations are conditional in nature and become the responsibility of the finance ministry only after the borrower fails to repay the debt obtained against the sovereign guarantees. For instance, in the last fiscal year, the federal government had to renew the guarantees issued for settlement of circular debt and to borrow loans for Nandipur power plant.

The privatisation of power companies was one of the four pillars of the IMF programme. But not even a single loss making entity was privatised or made profitable due to opposition by the Ministry of Water and Power and labour unions.

Out of Rs937 billion in total guarantees, Rs850.5 billion were against domestic currency - up by 141% or Rs500 billion compared to four years ago. Close to Rs86.4 billion worth of guarantees were issued against foreign currency - down by 68% over four years ago.

The federal government had issued Rs586 billion worth of new sovereign guarantees in the last fiscal year 2016-17, equal to 1.84% of Gross Domestic Product. Under the Fiscal Responsibility and Debt Limitation Act of 2005, fresh guarantees should not exceed more than 2% of the national GDP in any fiscal year.

Historically, this ratio has remained below one per cent of the GDP for a full year except in 2008, 2009 and 2010 when it increased to 2.2%, 2.1% and 1.5% of the GDP, respectively.

In its latest Global Economic Prospects report, the World Bank has also highlighted risks that Pakistan faces because of growing debt. It said that contingent liabilities have again started piling up in Pakistan, including those from the power sector.

The finance ministry has not disclosed the break-up of these guarantees, although the State Bank of Pakistan’s data gives some insight. The SBP data showed that the PSEs’ debt as of June 2017 stood at Rs822.8 billion, which is near the figure of Rs850.5 billion outstanding sovereign guarantees.

The central bank data indicated that the Water and Power Development Authority’s outstanding debt stood at Rs81.4 billion, as of end June - up by 45% in one year. In the last fiscal year, the Economic Coordination Committee (ECC) of the Cabinet allowed the Ministry of Finance to issue sovereign guarantees to cover a loan of $140 million being taken by Wapda.

Pakistan International Airlines’ domestic debt stood at Rs122.4 billion by June this year -a net addition of Rs22.6 billion or 22.6%. Pakistan Steel Mills’ debt remained unchanged at Rs43.2 billion, as the country’s largest industrial unit has been shut for the past over two years.

The SBP data showed that the maximum increase in the domestic debt was under the heading of “other PSEs”, standing at Rs572.6 billion by June.

There was an increase of Rs205.3 billion or 55.9% in the debt of other PSEs in a single year. These are entities like Power Holding Private Limited (PHPL) where the government has parked its circular debt.

Out of total domestic guarantees of Rs850 billion, Rs398 billion were issued against PHPL’s debt.

The total circular debt including the one parked in PHPL is over Rs800 billion.

In November 2016, the federal government extended sovereign guarantees of Rs30.6 billion to the Nandipur power plant after the company was unable to retire its entire debt.

Published in The Express Tribune, October 1^st, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.