ISLAMABAD: The IMF has assessed that the combined accumulated losses of Public Sector Enterprises (PSEs) in Pakistan including PIA, Pak Steel Mills, power sector and others have exceeded Rs1.2 trillion or 4 percent of GDP.
The IMF staff also recommended additional electricity surcharges to facilitate cost recovery until the underlying structural issues are tackled. The Fund staff emphasised the urgency to arrest losses by the Pakistan International Airlines and Pakistan Steel Mill.
Many experts believe that the IMF has underestimated the total accumulated losses of PSEs as it had already crossed Rs1.6 trillion in case of three major loss making sectors, including the power sector, PIA and PSM. “The combined accumulated losses by these PSEs now exceed Rs1.2 trillion (4 percent of GDP), which could eventually lead to sizeable demand of budgetary resources,” the IMF states in its latest post programme monitoring (PPM) released last week.
Fiscal risks, the IMF says, also stem from continued loss-making in the Public Sector Enterprises (PSEs). Privatisation and restructuring of key loss-making PSEs have been largely on hold.
Meanwhile, the IMF says the financial losses by the state-owned airline and steel mill have continued to accrue, while the accumulation of new payment arrears of power distribution companies (so-called “circular debt”)—which was brought to near zero at end-FY 2015/16—has resumed, reaching Rs193 billion (0.5 percent of GDP) since July 2016, with an accumulated stock of such arrears of Rs514 billion (1.5 percent of GDP) by end-December 2017.
In addition, inter-agency arrears in the gas sector, although still low, have been rising, reflecting limitations in the current cross-subsidisation arrangement between the two publicly-owned gas companies and delays in updating gas tariffs.
The fiscal deficit will likely remain elevated. On current policies, staff projects the budget deficit (excluding grants) to reach 5.5 percent of GDP this year (5.9 percent of GDP underlying deficit excluding one-off operations). Stronger tax revenue (12.9 percent of GDP, up from 12.5 percent last year)—owing to robust import growth, higher oil prices, the recent exchange rate depreciation, and imposition of regulatory duties—and lower interest expenditure are expected to provide a moderating effect on the deficit.
In addition, the authorities’ decision to restrain the budgeted surge in development spending and to closely coordinate with the provinces to maintain fiscal discipline will be helpful. That said the pre-election period could pose significant risks to maintaining fiscal discipline.
Over the medium term, quasi-fiscal losses and arrears by PSEs are expected to persist and the fiscal deficit will likely remain elevated, at around 5.8 percent of GDP, as growing interest expenditure and PSE’s subsidy requirements would be counterbalanced by improvements in revenue collection.
Pakistani authorities expect higher growth and lower imbalances in the period ahead. The authorities thought that staff’s baseline scenario does not adequately reflect their recent policy measures aimed at fiscal consolidation and improving the external account, including through containing development spending, exchange rate adjustment, and measures to curtail imports and promote exports in the short term.
The authorities believe that these will generate a significant fiscal impact and restore sustainability of the balance of payments in the medium term. Under an upside scenario based on the authorities’ projections, faster revenue growth, supported by ongoing efforts to broaden the tax net, and a higher fiscal surplus at the provincial level would contain the general government budget deficit (excluding grants) to 5 percent of GDP in FY 2017/18. In addition, a stronger impact of the recent exchange rate depreciation and other policy measures on the trade balance could help contain the current account deficit to 4.4 percent of GDP in FY 2017/18. With this, gross reserves could stabilise at about $13.9 billion this year and recover to 2½–3 months of imports in the medium term.
Macroeconomic stabilisation gains and the ongoing cyclical momentum would lift real GDP growth to 6 percent this year and 6.5 percent in FY 2018/19, supported by higher investor confidence. The authorities also emphasised their resolve to take additional policy measures to address the current macroeconomic vulnerabilities as needed.
Staff urged decisive short-term actions to contain quasi-fiscal losses in PSEs. Staff welcomed the authorities' intention to notify revised electricity tariffs, which would help contain the buildup of power sector arrears, and urged faster implementation of other components of the circular debt reduction plan (including continued efforts toward improving distribution companies’ losses and collections).