ISLAMABAD: Pakistan’s total stock of sovereign guarantees is expected to increase to Rs3.2 trillion by June 30, 2022.
According to the statement of the contingent liabilities of the federal government, the government is expected to issue new sovereign guarantees of Rs493 billion during the ongoing fiscal year and hence the total stock of sovereign guarantees will increase to Rs3.2 trillion till June 30, WealthPK reported.
Contingent liabilities of Pakistan are primarily guarantees issued on behalf of public sector enterprises (PSEs). The sovereign guarantee is normally extended to improve financial viability of projects or activities undertaken by the government entities with significant social and economic benefits. It allows public sector companies to borrow money at lower costs or on more favourable terms and in some cases allows them to fulfil the requirement, where sovereign guarantee is a pre-condition for concessional loans from bilateral or multilateral agencies, to sub-sovereign borrowers.
The volume of new government guarantees issued during a financial year is limited under Fiscal Responsibility and Debt Limitation Act (FRDLA) which stipulates that the government shall not give guarantees aggregating to an amount exceeding 2% of the GDP (gross domestic product) in any financial year.
WealthPK reported that during July to September 2021, the government issued fresh or rollover guarantees/letters of comfort (LoCs) aggregating to Rs64 billion or 0.1% of GDP. Total executed guarantees were Rs2.8 trillion, while outstanding stock was Rs2.472 trillion at the end of September 2021.
It was a condition of the International Monetary Fund (IMF) to lay details of government guarantees before the National Assembly for the revival of the program. Further, sector-wise breakup of the total outstanding guarantees stock shows Rs915 billion guarantees issued in favour of Power Holding Limited (PHL), Rs829 billion in favour of Pakistan Atomic Energy Commission (PAEC) and Rs214 billion in favour of the Pakistan International Airlines (PIA). Sovereign guarantees of Rs69 billion were issued in favour of Sindh Engro, Rs58 billion for National Transmission and Dispatch Company (NTDC) and Rs388 billion in the category of others. The outstanding stock of commodity operations was Rs718 billion at the end of September 2021.
The Ministry of Finance stated that guarantees issued against commodity operations are not included in the stipulated limit of 2% of GDP as loans are secured against underlying commodity and are essentially self-liquidating. These guarantees are issued against the commodity financing operations undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage and Services Corporation (PASSCO) and provincial governments, WealthPK reported.
The breakup of outstanding guarantees stock highlights that 83% of guaranties were issued in favour of power sector, 9% for aviation and 9% for financial, manufacturing, oil and gas and other sectors collectively. Breakup on the basis of interest rate shows that Rs1,653 billion (67%) of guarantees were issued on floating rate, while Rs820 billion (33%) were issued on fixed rate.
It also highlights that the government is expected to issue Rs28 billion sovereign guarantees during the ongoing financial year in favour of Public Private Partnership (PPP) projects, Rs5 billion for Roosevelt Hotel, New York, Rs3 billion for Pakistan Steel Mills (PSM), Rs4 billion for National Transmission and Dispatch Company (NTDC) and Rs20 billion for Jamshoro and Lakhra power plants.
The Rs17 billion sovereign guarantees will be issued in favour of Pakistan International Airlines (PIA), Rs50 billion for Water and Power Development Authority (WAPDA), Rs40 billion for the Kamyab Pakistan Programme and Rs10 billion for Kamyab Jawan (Youth Enterprises Scheme), while guarantees of Rs306 billion will be issued under the category of others, according to WealthPK.
The Finance Ministry informed that change was brought in value of external guarantees due to exchange rate movements. Analysts believe that the massive increase in the contingent liabilities highlights deterioration in the health of PSEs, mainly the power sector, PIA and the PSM, and the government needs to fast track its work on the restructuring of these entities to avoid burden on national exchequer. -INP
