Contingent liabilities were the sacred item three years ago and it is only recently that they have become public when they were published first time in an official document, the Economic Survey of 1999-2000.

Contingent liabilities are hidden fiscal liabilities which can jeopardize fiscal sustainability of an economy. It is really interesting to read an article on contingent liabilities in EBR (October 06, 2003) but it is also unfortunate that the article is based on an exclusive news item in “Dawn” (September 15, 2003).

The news item was actually based on a World Bank Report, “Pakistan oil and gas sector review” published on July 10, 2003 in which the World Bank recommended full liberalization of oil and gas sector and an end to the government’s active role in this field. It did recommend the government to get rid of Rs.33 billion worth of contingent liabilities in the sector. The World Bank actually acknowledged the full cooperation of the government agencies in quantification of contingent liabilities incorporated in the report.

As a matter of fact I am not representing the government’s point of view on the issue but just only to keep the record straight and put things in their proper perspective, I have to write these lines. There is no question of furnishing details about contingent liabilities because these are already published in widely circulated government document,the Economic Survey for last four years. The details of contingent liabilities and tax expenditure are also made available on the website of the ministry of finance. Dawn in its issue of June 06, 2003 has published a report on contingent liabilities on its business page under the caption “Contingent liabilities to cross Rs75bn: Projection for next fiscal”. The report was based on information provided in the Economic Survey 2002-03 and federal budget document 2003-04. It is evident that there is nothing to hide on the issue, then why the World Bank has asked the government to furnish details of contingent liabilities.

There was merely a reference to an unknown communication to the government in the news report but nothing is available on the World Bank’s or the government’s website about this communication. The government kept also silent on this very important issue which naturally created doubts.

The multilateral institutions commend the government’s efforts towards fiscal transparency. The IMF praised government’s efforts towards fiscal transparency and public exposure of fiscal data. The IMF in its presentation in Pakistan Development Forum, Islamabad (May 12-14, 2003) stated that “fiscal transparency has considerably improved, including regular publication of fiscal accounts, of PRSP progress reports, and of public contingent liabilities. More generally, the authorities have established an outstanding track record of publishing their policy memoranda related to Fund-supported programmes in recent years, including the often critical reports prepared by the staff”.

The IMF report on Pakistan goes on to the extent of saying; “the oil and gas sectors have been significantly liberalized, with the introduction of market-oriented pricing and the sale of government stakes in this sector. The restructuring of the publicly-owned banks has moved ahead and has allowed the successful privatization of a nationalized bank (UBL) last fall. The major public enterprises have been made more accountable through the adoption of financial improvement plans, with quarterly targets and quarterly progress reports posted on the ministry of finance’s website”.

The World Bank’s report, “Pakistan development policy review: a new dawn?” published on April 3, 2002 also praised the government’s fiscal policy in these words, “The quality of the federal budget presentation has improved significantly, with the FY2002 budget showing contingent liabilities, tax expenditures, and subsidies”. Now how World Bank can say like “contingent liabilities remain unaccounted for”. It was the World Bank and IMF which were pressing the government so hard for making contingent liabilities public to ensure fiscal transparency. The government has done well to make all direct and contingent liabilities public. True is the fact that the work done by the government on the issue of fiscal transparency is far from ideal but still it deserve compliments for enhancing the level of public exposure for fiscal data.

The second issue which is highlighted in the article concerns the government guarantees of private loans. In this regard, I must refer to “Fiscal Responsibility and Debt Reduction Ordinance, 2003” which was approved in the Cabinet in July contains a clause about “ not to issue guarantees, including those on rupee borrowing by public sector enterprises (PSEs), minimum rates of return, output purchase agreements, and all other claims and commitments for any amount exceeding two percent of GDP”. The issue is discussed in my article published in EBR on July 15, 2003.

The government could not eliminate outrightly the guarantees and even in highly free market economies, the government guarantees are used as important fiscal tool for efficient resource allocation. Even in the USA government issues credit guarantees, however, budget and the reported deficit reflect on present value of the expected cost of newly issued credit guarantees. Budget office is responsible for risk analysis and monitoring of guarantees. In Canada and Netherlands expenditures and guarantees are subject to a single budget ceiling for each sector (sectors are cash-neutral) and present value of expected fiscal cost is transferred from the sectoral budget allocation to a central reserve fund. In Sweden and Colombia the debt office is responsible for risk analysis of proposed contingent liabilities and for the risk management of both contingent and direct liabilities outstanding. Debt office collects fees from guarantee beneficiaries to build a reserve fund.

From the above discussion it is evident that issuance of government credit guarantees is part of overall fiscal policy and useful form of government support. But the government should be vigilant to assess extent of support required and risk exposure. The government’s debt office in collaboration with budget office should evaluate what form of government involvement is required and in which direction (deregulation, subsidy, contingent support, benefits and risks of alternative forms)? Only then it could design the programme to cover only justifiable risks and to minimize moral hazard (fit with policy priorities).

The government should be well aware of the most likely and maximum likely future fiscal cost. Therefore, there should not be a ban on issuance of guarantees as suggested in the article under review but there should be restraints on it. In the past generous issuance of guarantees played havoc with financial position of many Public sector enterprises. We may not expect the repetition of policy blunders of the past. Now the government is moving from a discretionary fiscal policy fuelled by political expediency to rule-based restrained fiscal policy. Realization of past mistakes is itself self-explanatory.

Every government and corporate entity in the world has direct and contingent liabilities. Even direct liabilities like sovereign borrowing (both domestic and external, issuance of securities) contains several risks like currency, maturity, floating rate, link to assets, etc. The contingent liabilities are in real sense not liabilities of the government because it has to enter only after the failure of another party. Pakistan has suffered a lot in the past for failures of different entities on their obligations.

Pakistan has succeeded in recent times in reducing contingent liabilities drastically from Rs. 151 billion in 2001-02 to Rs. 100 billion in 2002-03 and likely to further reduce it to Rs.75 billion in 2003-04. The main liability of the government is power generation sector comprised of KESC and WAPDA. The government is not only improving financial viability of both organizations but also has established a monitoring mechanism by providing quarterly information on the website of the ministry of finance. It implies that the policy makers have learnt the art of living with the contingent liabilities.

The government has to build shock absorbing capacity to meet the challenges emanating from unforeseen events. The abrupt nature of events on global scene has asked for greater vigilance and alertness. The governments across the globe have started methodologies to evaluate fiscal vulnerability and immediate macroeconomic and behavioural implications of risks, and to build stress-scenarios.

Pakistan has also entered in the list of these countries which has established institutions like debt office to remove the existing bias of policy makers for more contingent liabilities (disclosure, budgeting for risk, broadening the MTEF). The techniques to identify risks on management of smaller quantum of contingent liabilities, and evaluate and structure government risk exposure. The methodology of reserve requirement and techniques to apply portfolio approach to fiscal and liability management, beside securitize (bond issue) and hedge specific (residual) risks, are not alien to the public policy making.

The government has done well on fiscal exposure count but it has miserably failed to reform Wapda and the KESC. Resultantly, a hefty amount of Rs.67 billion is budgeted to bail out these organizations and the government has become virtually handicapped in providing some relief to the common man. True is the fact that we need better expenditure management and eliminate tax evasion to make this country a better place to live for all.