Loss-making PSEs: barrier to economic growth

LAHORE: Loss-making public-sector enterprises (PSEs) are a significant obstacle to Pakistan’s economic growth as they require government bailouts and subsidies to remain operational. These financial drains could otherwise be allocated to social sector or development projects.

Such inefficiencies create multiple distortions in the economy. Increased fiscal deficits caused by these losses lead to higher borrowing, which raises debt servicing costs and diverts resources from productive investments, ultimately slowing economic growth. Many PSEs operate in monopolistic or protected environments, discouraging competition from the private sector. Their inefficiency prevents them from generating value, despite consuming substantial resources. Moreover, private enterprises are deterred from entering sectors dominated by inefficient PSEs, reducing innovation and overall economic productivity.

Pakistan’s economy is already facing numerous growth challenges, and key factors such as corruption, weak institutions and poor governance exacerbate systemic inefficiencies, distorting incentives across all sectors. While terrorism has caused severe setbacks in the past, its current impact has diminished. Non-accountable discretion and a departure from merit further erode trust and efficiency, often stemming from broader issues of governance and corruption.

Pakistan’s loss-making PSEs, such as Pakistan International Airlines (PIA), Pakistan Steel Mills, and energy distribution companies, serve as prime examples of these challenges. PIA has accumulated billions in losses, requiring repeated bailouts over the past 15 years. Circular debt in the energy sector has ballooned due to inefficiencies in state-run power distribution companies, leading to load-shedding and higher energy costs. Despite years of non-operation, the Steel Mills continue to drain public resources for salaries and maintenance.

To alleviate the burden of money-losing PSEs on growth, the government must privatise non-strategic PSEs to improve efficiency and reduce fiscal burdens. For strategic PSEs that the government chooses to retain, it must enhance governance, accountability and management. The state should encourage competition through policy support and phase out preferential treatment that distorts markets. In cases where there are no buyers, the government should consider public-private partnerships (PPPs) to leverage private-sector expertise and investment, improving PSE performance while sharing risks.

Loss-making PSEs present a significant obstacle to Pakistan’s economic growth. Addressing this issue is crucial for improving fiscal health, fostering private-sector development, and enhancing overall economic efficiency.

These PSEs often benefit from preferential treatment, such as tax exemptions, subsidized inputs, or tariff protections, which create market distortions and unfair competition. As a result, resources are allocated inefficiently, favouring unproductive PSEs over potentially more efficient private-sector players.

Each loss-making PSE in Pakistan suffers from overstaffing, outdated technology and mismanagement due to a lack of accountability and political interference. These enterprises generate lower output relative to the resources employed, reducing overall economic efficiency and hindering GDP growth. The funds used to sustain loss-making PSEs could be better invested in higher-growth sectors, such as renewable energy, IT or export-oriented industries. This misallocation of resources limits the economy’s ability to expand and diversify.

Sustained support for PSEs leads to borrowing, which is financed by printing money or increasing debt. This results in inflation and higher interest rates, negatively affecting businesses and consumers, and reducing overall economic activity. Chronic losses in PSEs also undermine public confidence in the government’s ability to manage resources effectively. The resulting lack of trust can deter both domestic and foreign investment, further slowing growth.