Contingent liabilities rise to 2.9 percent of GDP

KARACHI: Pakistan’s outstanding stock of contingent liabilities (CLs) rose to Rs936.9 billion or 2.9 percent of gross domestic product in the last fiscal year due to an increase in government guarantees for debt-ridden state-run firms, the central bank report said on Thursday.

“The issuance of new guarantees amounted to Rs586.3 billion during FY17 compared to an average of Rs143 billion during last five fiscal years,” the State Bank of Pakistan said its annual report for FY17. “Importantly, around 90 percent of the guarantees were on domestic loans.”

Guarantees are generally issued to public sector enterprises (PSEs) to cover for their losses and to ensure smooth running of their risk, as guarantees usually cover losses on default.

The central bank said the main risk associated with the CLs is the fiscal cost after their occurrence. Once realised, these could result in additional burden on the government resources and can lead to a higher debt/GDP ratio.

“Despite significant increase in the new guarantees issued, it remained within the limit of 2 percent of GDP set under the Fiscal Responsibility and Debt limitation Act 2005,” the report said. “At the same time, the stock of the PSEs debt has increased sharply by Rs232.3 billion during FY17 with the stock of PSE debt reaching Rs1.0 trillion as of June 2017 or 3.5 percent of the GDP.”

“This coincides with the reduction in expenditures on subsidies, which are alternate to guarantees.” The SBP said the government expenditures on contingent liabilities have in general declined in terms of GDP in past few years. Despite some improvements, annual financial losses of PSEs remain at 0.3 percent of GDP, reaching around 3.8 percent of GDP in cumulative terms.

The central bank said the CLs have to be managed to minimize their fiscal costs and impact on debt sustainability. “It has become more important, particularly in view of projects under CPEC, some of which are in public-private partnership mode,” it added. “The absence of any oversight on CLs could either result in fiscal cost or disruption in the projects or production process in public entities.”