ISLAMABAD, June 4: Pakistan’s explicit liabilities, which are cash-outflow streams from the federal budget, have increased by 63 per cent to Rs24.5 billion, compared with last year’s Rs15 billion, reveals Economic Survey 2005-06.
However, overall contingent liabilities (both explicit and implicit) have amounted to Rs92 billion during the current fiscal year, down by 2.9 per cent from Rs95 billion last year, says the survey, which was released here on Sunday.
The contingent liabilities have reduced to 1.19 per cent of GDP against last 1.44 per cent of GDP. These liabilities posed threat to the national budget and could contribute to the budget deficit.
“Contingent liabilities grow with weaknesses in the financial sector, macroeconomic policies, regulatory and supervisory system and information disclosure”, says the survey.
The survey suggests that Wapda, KESC, Pakistan Railways and Pakistan International Airlines “have been the largest drain on the budget”, which together stood at about Rs67.4 billion.
Of the total Rs92 billion, explicit liabilities stood at Rs24.5 billion in 2005-06 against Rs15 billion in 2004-05, up by 63 per cent. Implicit liabilities, on the other have, however, reduced by 15.4 per cent to Rs67.4 billion in 2005-06 to Rs79.6 billion last year.
Of the explicit liabilities, which have a direct impact on federal budget in the shape of cash outflow streams, the highest share of Rs8 billion is provided for Wapda’s Sukuk bonds, followed by Rs4.08 billion guarantees for 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 Fertiliser Company stand at Rs1.31 billion and Rs1.01 billion respectively, although FFC is considered a private enterprise.
Another amount of Rs3.18 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 Rs43 billion belonged to Wapda on account of subsidy and non-recovery of loans, followed by KESC at Rs12 billion. Another major chunk of Rs9.86 billion has been given as subsidy to commodity operations besides another Rs0.28 billion subsidy to Utility Stores Corporation. A sum of Rs2 billion is paid out to Pakistan Railways to meet its operational shortfalls.
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. At that point, the contingent liability will become an actual liability of the government, and a payment must be made.
These are specific government obligations defined by a contract or a law. The government is legally mandated to settle such an obligation when it becomes due.
Explicit contingent liabilities legally oblige the government to make a payment if a specific event occurs. Because their fiscal cost is invisible until they are triggered, contingent explicit liabilities represent a hidden subsidy, blur fiscal analysis, and can drain future government finances.
On the other hand, implicit contingent liabilities are not officially recognised until a failure occurs. The triggering event, the amount at risk, and the required government outlay are uncertain.