ISLAMABAD, June 4: Contingent liabilities (both explicit and implicit) have increased by 25 per cent to Rs95 billion during the current fiscal year from Rs75.9 billion last year, reveals Economic Survey 2004-05. These liabilities have also increased as percentage of GDP and stood at 1.44 per cent of GDP compared with 1.39 per cent of GDP last year. These liabilities had started to decline in the last few years but again started posing threat to the national budget.

“Contingent liabilities grow with weaknesses in the financial sector, macroeconomic policies, regulatory and supervisory system and information disclosure,” says the survey.

Of the total Rs95 billion, explicit liabilities stood at Rs15 billion in 2004-05, up by 14 per cent when compared with Rs13.2 billion of last year. Similarly, implicit liabilities have increased from Rs62.7 billion last year to Rs79.6 billion this year, showing an increase of 27 per cent.

Of the explicit liabilities, which have a direct impact on federal budget in the shape of cash outflow streams, the highest share of Rs3.66 billion is provided by government guarantee against Saindak Copper Gold Project, followed by Rs3.24 billion against Pakistan Railways.

Another Rs3.76 billion guarantees are against Ghee Corporation of Pakistan, Rice Export Corporation of Pakistan, Trading Corporation of Pakistan and Cotton Export Corporation.

Government guarantees against Pakistan International Airlines and Fauji Fertilizer Company stand at Rs1.43 billion and Rs1.02 billion respectively. During FY 2004-05, Rs1.43 billion was paid out as an interest (equity) to the restructured loans and Term Finance Certificates to PIA. The government has guaranteed interest payments (restructured loans and TFCs) for five years starting in FY 2001-02.

Another amount of Rs3.24 billion has been paid on account of Pakistan Railways debt servicing liability (Government guaranteed loans). Of the implicit liabilities, the highest share of more than Rs50 billion belonged to Wapda on account of subsidy and non-recovery of loans, followed by KESC at Rs19 billion.

Contingent liabilities are costs which the government will have to pay if a particular event occurs. These are obligations triggered by a discrete but uncertain event. Relative to government policies, the probability of a contingency occurring and the magnitude of the required public outlays are exogenous or endogenous.

These liabilities are associated with major hidden fiscal risks. A common example of a contingent liability is a government-guaranteed loan. At the time a guarantee is entered into there is no liability for the government, since this is contingent upon the borrower failing to repay the loan as contracted.

However, in the event of default, the lender can invoke the guarantee and the government will be obliged to repay the amount of the loan still outstanding.