PSEs loss swells to Rs1.2t, says IMF

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 Pakistan International Airlines and Pakistan Steel Mill.

Many experts believe that the IMF has under estimated total accumulated losses of PSEs as it had already crossed Rs1.6 trillion in case of three major loss making sectors including 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 sizable 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 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.