Cushioning troubled PSEs: Government ignores ceiling for sovereign guarantees
Provides guarantees of Rs532b against threshold of Rs413b.
ISLAMABAD:
In violation of laws enacted to ensure fiscal discipline, the federal government has extended Rs532.4 billion worth of sovereign guarantees to the bleeding public sector enterprises (PSEs), according to an official report, indicating hidden risks to economic stability of the country.
Total sovereign guarantees by June 2012 swelled to Rs532.4 billion, according to the Ministry of Finance. This includes $2.7 billion or Rs254.2 billion in foreign currency guarantees and Rs278.2 billion in local currency guarantees.
The sovereign guarantees extended to the PSEs exceed the limit imposed under the Fiscal Responsibility and Debt Limitation Act of 2005, which says that the guarantees, both renewed and new, should not be more than 2% of gross domestic product (GDP) in any fiscal year.
By this account, the guarantees should not have exceeded Rs413 billion. The actual guarantees stood at 2.6% of GDP, according to the finance ministry.
The guarantees for commodity operations are not included in the limit of 2% as these are secured against the underlying commodity and are essentially self-liquidating.
Interestingly, the finance ministry has itself admitted the risks posed by the significant increase in sovereign guarantees to the macroeconomic stability of the country.
“Such off balance sheet transactions cannot be overlooked in order to gain a holistic view of a country’s fiscal position and unveil the hidden risks associated with the obligations made by the government outside the budget,” says a finance ministry’s document.
It adds that the reported debt levels of a sovereign country may be understated by not including such contingent liabilities.
For the last five years, the country’s debt burden has almost doubled due to declining revenues in terms of GDP and increasing expenditures. By June this year, total public debt soared to 60% of GDP or Rs12.4 trillion, according to the finance ministry.
Of the total, domestic debt was Rs7.5 trillion or 36% of GDP and external debt was roughly Rs5 trillion or 24% of GDP.
In the past five years, the PPP-led coalition government issued cumulative sovereign guarantees of Rs848 billion to the PSEs, according to the ministry’s documents. The government also defaulted on sovereign guarantees given to the independent power producers for the first time in the country’s history.
In the previous fiscal year ended June 30, the budget deficit also swelled to a historic high of 8.5% of GDP or Rs1.76 trillion, which resulted in massive borrowing from the banking system.
The violation of the Fiscal Responsibility and Debt Limitation Act is a breach of parliament’s privilege and the parliamentarians should take notice of persistent violation by the finance ministry, said Dr Ikramul Haq, a columnist and an expert in fiscal affairs.
He suggested that parliament should constitute a review committee to determine the problems and causes leading to violation of the Act and recommend measures for their rectification.
Haq said the high sovereign guarantees and massive borrowing to finance the deficit indicate that the country may soon get trapped in a vicious debt cycle.
Published in The Express Tribune, August 28th, 2012.
In violation of laws enacted to ensure fiscal discipline, the federal government has extended Rs532.4 billion worth of sovereign guarantees to the bleeding public sector enterprises (PSEs), according to an official report, indicating hidden risks to economic stability of the country.
Total sovereign guarantees by June 2012 swelled to Rs532.4 billion, according to the Ministry of Finance. This includes $2.7 billion or Rs254.2 billion in foreign currency guarantees and Rs278.2 billion in local currency guarantees.
The sovereign guarantees extended to the PSEs exceed the limit imposed under the Fiscal Responsibility and Debt Limitation Act of 2005, which says that the guarantees, both renewed and new, should not be more than 2% of gross domestic product (GDP) in any fiscal year.
By this account, the guarantees should not have exceeded Rs413 billion. The actual guarantees stood at 2.6% of GDP, according to the finance ministry.
The guarantees for commodity operations are not included in the limit of 2% as these are secured against the underlying commodity and are essentially self-liquidating.
Interestingly, the finance ministry has itself admitted the risks posed by the significant increase in sovereign guarantees to the macroeconomic stability of the country.
“Such off balance sheet transactions cannot be overlooked in order to gain a holistic view of a country’s fiscal position and unveil the hidden risks associated with the obligations made by the government outside the budget,” says a finance ministry’s document.
It adds that the reported debt levels of a sovereign country may be understated by not including such contingent liabilities.
For the last five years, the country’s debt burden has almost doubled due to declining revenues in terms of GDP and increasing expenditures. By June this year, total public debt soared to 60% of GDP or Rs12.4 trillion, according to the finance ministry.
Of the total, domestic debt was Rs7.5 trillion or 36% of GDP and external debt was roughly Rs5 trillion or 24% of GDP.
In the past five years, the PPP-led coalition government issued cumulative sovereign guarantees of Rs848 billion to the PSEs, according to the ministry’s documents. The government also defaulted on sovereign guarantees given to the independent power producers for the first time in the country’s history.
In the previous fiscal year ended June 30, the budget deficit also swelled to a historic high of 8.5% of GDP or Rs1.76 trillion, which resulted in massive borrowing from the banking system.
The violation of the Fiscal Responsibility and Debt Limitation Act is a breach of parliament’s privilege and the parliamentarians should take notice of persistent violation by the finance ministry, said Dr Ikramul Haq, a columnist and an expert in fiscal affairs.
He suggested that parliament should constitute a review committee to determine the problems and causes leading to violation of the Act and recommend measures for their rectification.
Haq said the high sovereign guarantees and massive borrowing to finance the deficit indicate that the country may soon get trapped in a vicious debt cycle.
Published in The Express Tribune, August 28th, 2012.