KARACHI, June 20: The stock of contingent liabilities continues to pose “a serious fiscal risk” despite efforts to reform state-run units and the financial system, analysts said here.

“Over the last few years,” cash calls “on the budget on account of insufficiently restructured public sector enterprises (PSEs) have increased at a worrying pace,” say economists at a leading foreign bank.

Although the Pakistan Railways was declared a success story with “financial turnaround” in 2001, a sum of Rs8 billion has been allocated for fiscal 2004 in addition to the Rs8.1 billion given in 2003.

By budgeting resources including grants amounting to about two per cent of the GDP including an allocation of Rs54 billion for Wapda and KESC, analysts at ABN-Amro noted that the government has implicitly acknowledged the painfully slow progress being made to restructure these enterprises.

Since 1999-2000, says a study by the bank, fiscal haemorrhaging on account of PSEs has amounted to a cumulative 11 per cent of the GDP with the share of Wapda and KESC at 9 per cent. The most worrying feature of the budget relates to the continuing heavy fiscal drain on account of Wapda and KESC.

Typically, analysts say the most serious contingent implicit liabilities arise out of the government role (through the central bank) as guarantor of stability of the financial system.

The State Bank’s profits declined by Rs20 billion against the budgeted amount in fiscal 2003 because of the losses it incurred in sterilizing the rupee proceeds from the dollar purchases to keep the rupee stable against the greenback.

Earlier, the State Bank incurred massive losses when it bought dollars from the kerb market to repay foreign debts and build reserves. For fiscal 2004, the SBP profits are budgeted at zero that reflects the continuing sterilization operations.

Pakistan’s stock of contingent liabilities increased in second half of 1990s because of increasing recourse by the government to guaranteeing financial outcomes of the private sector. This practice was given a significant impetus under the advice of multilateral donors in case of Hub Power Company and private power policy of 1994.

Implicit contingent liabilities are potentially more destabilising in fiscal terms since the triggering event, the amount at risk and the required government outlay are all uncertain until a failure occurs, says the ABN-Amro report.

In addition, the fiscal authorities are also compelled to cover unfunded loss of large public enterprises and even on occasions, of even large private sector firms to avert or mitigate the threat of economic disruption.