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IMF bars Pakistan from extending sovereign guarantees till December review

IMF bars Pakistan from extending sovereign guarantees till December review

September 26, 2019

ISLAMABAD: The IMF has barred the government not to extend any sovereign guarantee till December review this calendar year and owing to this every reason, it has told Power Division that it is unable to provide sovereign guarantee for another Islamic Sukuk bond of Rs200 billion to partially retire the circular debt.

The government had already arranged Rs200 billion from Islamic banks for which it had extended sovereign guarantee apart from pledging the assets of the electric power distribution companies, but this time, the IMF has stopped the government from extending the sovereign guarantees, one of the top men of the Power Division told The News.

“Pledging of assets for the loan is mere a notional thing, but sovereign guarantee factually matters that IMF has stopped the government till the completion of second quarter by December, 2019 after obtaining the IMF loan programme.

The News contacted the Finance Ministry Spokesman Omar Hameed and he said that IMF has barred Finance Ministry from giving any sovereign guarantee till December 2019. The News also aspired to know if it is true and if yes, why IMF has asked FM not to give any guarantee till December. The News also wanted to know how many sovereign grantees government can give and what is the criterion.

Omar Hameed, however, while responding confirmed the development saying in order to ensure fiscal discipline and debt sustainability, GOP has developed a policy framework which has also been agreed as part of the Extended Fund Facility provided by IMF. “Under this framework, GoP has decided to set a ceiling (equal to 3.6 percent of GDP) on government guaranteed debt. The framework is reviewed on a quarterly basis in the light of progress already made, prevailing economic circumstances, and the overall objectives of achieving higher economic growth and debt sustainability.

However, according to Zargham Eshaq Khan, Joint Sector Power (Finance) told The News that the menace of circular debt including the liabilities of power sector has soared to Rs1.656 trillion. He said according to the definition of circular debt, the payables by the CPPA is circular debt which stands at Rs861 billion. However, the liabilities and loan of power sector parked in GHPL (Power Holding Private Limited) stand at Rs804 billion.

To a question, he said that Power Division will start giving the amount out of the power’s sector subsidy amounting to Rs226 billion to PSO, IPPs and other stakeholders once the invoices are verified. However, the receivables of CPPA stand at Rs869 billion. He said the monthly inflows in circular debt has reduced from Rs38 billion to Rs20 billion which will be made zero till December 2020. He said due to certain actions to contain, the government has recovered Rs75 billion so far and the overall recovery has increasing to over 92-94 percent.

To a question what modus operandi the government has to get rid of the piled up circular debt, he said that World Bank has offered to work the way out, but they have to interact yet with the Bank to this effect.

Another top official said that Finance Division had also sent the case of sovereign guarantee to SBP for comments and volume of guarantees which are to be retired to provide space for fresh Rs200 billion loan. The Ministry of Finance is waiting for central bank response," the sources added. As per the agreement with International Monetary Fund (IMF), Pakistan cannot extend sovereign guarantees over and above a specific limit of debt to government ratio of ceiling (equal to 3.6 percent of GDP) on government guaranteed debt.

The consortium of banks led by Meezan Bank has differences on interest with the Finance Division: the banks are sticking to Kibor + 0.8 percent (interest) whereas Finance Division is trying to convince them to accept Kibor + 0.7 percent.

In case Islamic loan of Rs200 billion is arranged, payments will be made to PSO on account of payment for fuel supplies through Hub Power Company (Hubco), Kot Addu Power Company (Kapco) and Generation Companies (Gencos) in addition to payments for RLNG. Further, payment on account of energy to coal-fired power plants will be made. Payment for capacity to nuclear power plants and Wapda to discharge their balance liabilities towards NHP arrears of the province against Wapda's invoices to CPPA-G will be also made. Balance payments will be made to IPPs against their outstanding capacity payments.