PAKISTAN’S contingent liabilities have been on a steady decline since the PML-N government came to power in May 2013, dropping from 0.6pc of GDP a year to a negligible 0.2pc.

This is significant when seen in the context of the Fiscal Responsibility and Debt Limitation Act, which allows new guarantees of no more than 2pc of GDP in a fiscal year.

This, however, raised suspicions when the government changed the template of the Economic Survey of Pakistan by removing the details of entities to which it had been extending new guarantees.

Over the decades, the Economic Survey of Pakistan used to have a list of entities along with their contingent liabilities. Now, the list has been removed and only a lump sum amount is mentioned. Private economists attribute this change to ‘creative accounting’ and question the reliability of official data.

For example, the IMF has estimated the latest power sector circular debt at Rs615bn — including fresh build up of Rs280bn — after the government cleared Rs503bn under this head in 2013. While Rs335bn are parked in the power holding company, the remaining Rs280bn is neither shown in the budget and nor funded by private sector loans.

This could also be an indication of the reluctance of lending institutions to extend credit to public sector enterprises because of their existing heavy exposure to these PSEs (even when they are backed by government guarantees), or because of the government’s overreliance on bank borrowings.

According to the Economic Survey of Pakistan 2014-15, the new guarantees issued by the federal government declined from 1.5pc of GDP in 2010 to 1pc in 2012, and then fell sharply to 0.6pc of GDP in 2013, 0.4pc in 2014 and 0.2pc (Rs67bn) in 2014-15.

The stock of outstanding guarantees has, however, moved in a narrow band, as it stood at Rs603bn in 2010 and Rs600bn in FY14-15. The rupee-guarantees accounted for 80pc of the total guaranteed stock.

Former economic adviser to the government Dr Ashfaque Hassan Khan said one reason behind the decline in the ratio of contingent liabilities was the expansion in the size of the GDP. Also, the government was keeping certain accounts off the books or paying through the budget instead of bank borrowing in view of the poor condition of PSEs.

For example, he said the Pakistan Steel Mills used to raise commercial loans against sovereign guarantees, but its condition had deteriorated and the government was meeting its requirements from the federal budget.

Likewise, the PIA also has a mix of dole-outs from the budget and government guarantees. Similarly, the power sector is now being fed through the federal budget or repeated increases in the power tariff, and yet a major part of the circular debt has been kept unaccounted for over the last two fiscal years.

Dr Khan said once questioned, the finance ministry could be expected to issue a corrigendum. He argued that the government had shown the size of the revenue loss on the account of discriminatory exemptions at Rs665bn for FY14-15.

When questioned why the withdrawal of the exemptions was adding to the loss, the government suddenly issued an ‘Errata’ to bring down this amount to Rs412bn.

Former principal economic adviser for the PPP government Sakib Sherani also questioned the authenticity of official data. He said it was very annoying that the quality of official data had been affected since the PML-N government came to power, and the data on contingent liabilities were just one piece of this problem.

He said it was not encouraging to note that the country was going back on the quality and standards of public disclosures instead of moving forward. He said there used to be a full chapter in the Economic Survey of Pakistan on contingent liabilities with full disclosure for many decades, and this practice was followed when he was a part of the government.

The current government’s economic adviser Ejaz Wasti is shy of media queries. According to his written explanation in the Economic Survey of Pakistan, contingent liabilities are considered conditional obligations that arise from past events, which may require an outflow of resources embodying economic benefits based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the government’s control.

Contingent liabilities can be distinguished from other liabilities since they are conditional in nature and do not represent the government’s present obligations. Accordingly, contingent liabilities are not recognised as liabilities regardless of the likelihood of the occurrence (or non-occurrence) of the uncertain future event.

The public debt may be understated without reporting contingent liabilities. Contingent liabilities are not added to the overall debt of the country.

However, such off-balance sheet transactions cannot be overlooked in order to gain a holistic view of a country’s fiscal position.

It is, therefore, imperative to examine contingent liabilities in the same manner as one would do with any loan proposal, like check the credit-worthiness of the borrower; the amount and risks sought to be covered by a sovereign guarantee; the terms of the borrowing; the justification and public purpose to be served; the probabilities that various commitments will become due; and the possible costs of such liabilities.

Guarantees issued against commodity operations are not included in the stipulated 2pc limit of GDP, as the loans are secured against the underlying commodity and are self-liquidating, according to the Economic Survey of Pakistan.

Published in Dawn, Economic & Business ,July 21st, 2015

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