PAKISTAN’S contingent liabilities, generally outstanding government guarantees for public sector enterprises, increased 10.5pc to Rs663bn by the end of March 2016, after a steady decline of a few years.

On March 31, 2015 the contingent liabilities stood at Rs600bn or 0.2pc of GDP, indicating that the PSEs are unable to stand on their own feet.

These liabilities declined from 1pc of GDP in 2012 to 0.6pc in 2013, 0.4pc in 2014 but rose back to 0.6pc by end of last fiscal year. These have already reached 0.4pc of GDP the first nine months and are well set to go beyond 0.7pc by the time accounts for the current fiscal year are closed.

The stock of outstanding guarantees moved in a narrow band as it stood at Rs603bn in 2010, declined to Rs560bn a year later and ebbed at Rs516bn in 2012 before rebounding to Rs663bn in fiscal year 2015-16-

Although still within legal limits, this should be cause for government’s concern which had come to power three years ago with a promise to turn around loss-making entities.

But another side to the story is the government’s apparent policy direction to let the Pakistan Steel Mills touch ground zero before getting rid of a major asset that could have contributed to national output and met demand created by the rising construction and infrastructure activities due to the $46bn China-Pakistan Economic Corridor (CPEC). PSM is no more being extended government guarantees although it used to be one of the key recipients of guarantees after power companies and PIA.

The share of rupee guarantees increased during the past few years and accounted for 85pc of total guarantees stock at the end March 2016 owing to repayments made against foreign currency guarantees, according to the ministry of finance. The share of rupee guarantee was 80pc at end-March 2015.

Contingent liabilities are not added to the overall debt. However, such off balance sheet transactions cannot be overlooked in order to gain a holistic view of a country’s fiscal position

The Fiscal Responsibility and Debt Limitation Act 2005 allows the government to issue new guarantees of no more than 2pc of GDP in a fiscal year. In first nine months of the current year, the government issued fresh guarantees or rolled over previous ones worth Rs104bn or 0.4pc of GDP. Eye brows were, however, raised when the government stopped releasing the names of the entities to which it had been extending new guarantees, thus adding to the contingent liabilities.

Over the decades, the government used to release a list of entities along with their contingent liabilities. Now, the list has been removed and only a lump sum amount is mentioned.

For example, the International Monetary Fund estimates the power sector circular debt at Rs635bn after the government cleared Rs503bn under this head in 2013. While Rs335bn are parked in the power holding company, the remaining Rs300bn are neither shown in the budget nor funded by private sector loans.

The government seems to be keeping certain accounts off the books or paying through the budget instead of bank borrowing in view of poor condition of PSEs.

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 backed by government guarantees or the government’s over reliance on bank borrowing.

For example, the PSM used to raise commercial loans against the government guarantees, which is no more the case. Its total loss and liabilities have now gone beyond Rs385bn but these are not shown on books. The PIA also has a mix of doleout from the budget and government guarantees now. Similarly, power sector was now being fed through the federal budget or repeated increases in power tariff ,and yet a major part of circular debt was being kept unaccounted for over the last two fiscal years.

A former economic adviser opined that the authenticity of official data had become a real issue in recent years. He said there used to be a full chapter in the economic survey over contingent liabilities with full disclosure of liabilities of each and every entity or operation; but this has now been reduced to a brief explanatory note.

The government, however, believes that contingent liabilities are conditional obligations that arise from past events that may require an outflow of resources. Contingent liabilities can be distinguished from the other liabilities as these are conditional in nature and do not represent present government 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 and conceal hidden risks.

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

Published in Dawn, Business & Finance weekly, July 4th, 2016