Rs436bn support extended to SOEs in six months

ISLAMABAD: The government injected a total of Rs436 billion into the lossmaking small and medium enterprises (SOEs) over the six-month period ending December 2023, accounting for over 7% of the federal budget’s receipts on annualized basis.

According to the bi-annual report on the SOEs — released by the Ministry of Finance under the IMF loan conditions — this support was divided into Rs120 billion in grants, Rs231 billion in subsidies and Rs85 billion in loans.

Notably, no equity injections were made during this period. This financial intervention accounted for over 7% of the federal budget’s receipts on an annualized basis.

According to the report, many SOEs rely heavily on fiscal support from the government, which can create inefficiencies and reduce incentives for operational improvements.

To address this dependency, the SOEs should develop self-sustainability plans that focus on reducing reliance on government funding. This includes enhancing the working capital management, restructuring debt and improving operational efficiencies to better manage debt servicing costs.

The report says extended receivables and payables cycles can strain the working capital of SOEs, leading to liquidity challenges.

“To improve cash flow, the SOEs should streamline their receivables and payables management, ensuring that they collect receivables promptly and negotiate favorable payment terms with the suppliers.

“Implementing more stringent credit control measures and enhancing the efficiency of collections can help address this issue.

“Guarantees and other contingent liabilities pose significant risks to the SOEs, particularly in cases where these liabilities materialize, leading to unexpected financial burdens.

“To mitigate these risks, the SOEs should reassess their risk management frameworks and implement robust financial models that accurately reflect potential liabilities. This includes reassessing the valuation methodologies for guarantees and implementing better risk assessment processes to manage these liabilities proactively,” says the report.

The guarantees provided by the government amounted to Rs1,400 billion. However, the valuation methodology for these guarantees needs improvement and alignment with international standards, including the use of option pricing models, credit risk models, contingent claims analysis and Monte Carlo simulations.

Variables such as Probability of Default (PD), Exposure at Risk (EAR), and Loss Given Default (LGD) should be used to value guarantees. Contingent liabilities related to the Public-private partnerships (PPPs) should also be analyzed in detail by the Public-Private Partnership Authority (P3A) in line with PIMA provisions.