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Massive jump in fresh sovereign guarantees

Updated October 13, 2017

KARACHI: Issuance of fresh sovereign guarantees jumped to Rs586.3 billion in 2016-17 from an average of Rs143bn for the past five years, according to the latest annual report by the State Bank of Pakistan (SBP).

The total stock of sovereign guarantees is now Rs936.6bn, or 2.9pc of GDP, with 90pc of these on domestic loans. The report warns that this “creates a moral hazard and increases the default risk as guarantees usually cover losses on default.”

At the same time, the stock of debt held by public-sector enterprises (PSEs) increased sharply by Rs232bn to reach Rs1 trillion, or 3.5pc of GDP, at the end of June. “This coincides with the reduction in expenditures on subsidies, which are alternate to guarantees,” the report notes. As subsidies have declined, government-guaranteed debt of PSEs has risen correspondingly.

Government guarantees are an alternate to subsidies, the report notes. The key difference between the two is that subsidies hit the budget directly but the issuance of guarantees only shows up on the fiscal account if they are realised in the event of a default.

The report notes the need for sovereign guarantees, saying they are still within the limits set by the law despite the increase. Instead, it provides some suggestions to better manage the growth of publicly guaranteed debt because it brings with it the risk of a sudden disruptive event that can hit key sectors of the economy.

Steps recommended for better management of the growing stock of guarantees include ceilings on fresh issuance, parliamentary approval of all new guarantees, limits on claims that lenders can make when invoking a guarantee, maintenance of a contingency reserve fund, greater oversight from the auditor general of Pakistan and an early warning system.

Published in Dawn, October 13th, 2017