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Saturday July 20, 2024

Country’s sovereign guarantees swell to Rs3.5tr

During July-March FY2023, government issued fresh or rollover guarantees aggregating to Rs76 billion or 0.1 percent of GDP

By Khalid Mustafa
June 12, 2024
A representational image showing a person counting Rs1,000 currency note.— AFP/File
A representational image showing a person counting Rs1,000 currency note.— AFP/File

ISLAMABAD: Pakistan’s outstanding stock of sovereign guarantees has increased to Rs3.505 trillion at March-end of FY2024.

The government issued external guarantees of Rs1.965 trillion and domestic guarantees of Rs1.540 trillion. External guarantees of $6.971 billion have been issued at rupee value of Rs278, says Economic Survey for 2023-24.

However, during July-March FY2023, government issued fresh or rollover guarantees aggregating to Rs76 billion or 0.1 percent of GDP.

The guarantees issued against commodity operations are not included in stipulated limit of 2 percent of GDP, as loans are secured against underlying commodity and are essentially self-liquidating. These guarantees are issued against commodity financing operations undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agriculture Storage & Services Corporation (PASSCO), and provincial governments.

The outstanding stock of commodity operations was Rs1.113 trillion at end-March 2024.

Economic Survey explains contingent liabilities of Pakistan are primarily those issued on behalf of Public Sector Enterprises (PSEs). A sovereign guarantee is normally extended to improve financial viability of projects or activities undertaken by government entities with significant social and economic benefits. It allows public sector companies to borrow money at lower costs or on more favourable terms in some cases to fulfil requirement where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to sub-sovereign borrowers.

The Fiscal Responsibility and Debt Limitation (Amendment) Act, 2005 under sub-section 3, clause (d) imposes following two ceilings related to government guarantees: Flow ceiling: 2pc of GDP on issuance of government guarantees, with renewal of existing guarantees being considered as issuing new guarantees. Stock ceiling: 10pc of GDP on total stock of outstanding government guarantees.

Contingent liabilities are possible obligation that arises from past events and their existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events, not wholly within control of the government.

Contingent liabilities should be examined in the same manner as a proposal for a loan, taking into account credit-worthiness of borrower, amount and risks sought to be covered by a sovereign guarantee, the terms of borrowing, justification and public purpose to be served, probabilities that various commitments will become due and possible costs of such liabilities. Such off-balance sheet transactions cannot be overlooked to gain a holistic view of a country’s fiscal position and unveil hidden risks associated with the obligations made by government outside the budget.