Govt issues sovereign guarantees against loans of Rs1.890tr

ISLAMABAD: The federal government has extended the sovereign guarantees worth Rs1.890 trillion in the first nine months of the outgoing financial year 2019-20.

However, during July-March 2019-20, the government issued fresh or rollover guarantees aggregating to Rs 115 billion, says a statement on contingent liabilities uploaded on the official website of the Finance Ministry.

The government has extended the biggest share of sovereign guarantees to the power sector against the loans of Rs1.113 trillion which is 59 percent of total volume of sovereign guarantees against the loans amounting to Rs1.890 trillion. The aviation sector has been provided the sovereign guarantees against the loans of Rs119 billion which amounts to 11 percent of Rs1.890 trillion. Similarly, the government has issued sovereign guarantees against loans of Rs66 million for the financial sector and Rs50 million for the manufacturing sector followed by the guarantees against the loans of Rs40 million for the oil and gas sector and Rs420 million for other sectors.

It is pertinent to mention that the guarantees issued against commodity operations of worth Rs649.3 billion are not included in the stipulated limit of two percent of GDP as the loans are secured against the underlying commodity and are essentially self-liquidating. That is why these cannot create a long-term liability for the government.

The quantum of these guarantees depends on the supply demand gap of various commodities, their price stabilisation objectives, volume procured, and domestic and international prices.

The guarantees were issued against the commodity financing operations undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage and Services Corporation (PASSCO), and provincial governments. The outstanding stock of commodity operations amounted to Rs649.3 billion as at end March 2020.

According to the statement, the federal government’s contingent liabilities are primarily guarantees issued on behalf of loss-making public sector enterprises (PSEs). The sovereign guarantees are normally extended to improve financial viability of new projects or activities undertaken by PSEs for social and economic benefits. Through government sovereign guarantees, PSEs are able to borrow finances at lower costs or on more favourable terms. In some cases, issuance of sovereign guarantees is a precondition for concessional loans from bilateral and multi-lateral.

The volume of new government guarantees issued during a financial year is limited under Fiscal Responsibility and Debt Limitation Act which stipulates that the government shall not give guarantees aggregating to an amount exceeding two percent of the GDP in any financial year including those for rupee lending, rate of return, outright purchase agreements and other claims and commitments provided the renewal of existing guarantees shall be considered as issuing a new guarantee.