ISLAMABAD, June 12: The government is projecting to bear a cost of Rs76 billion as explicit and implicit contingent liabilities on account of guarantees it had issued on behalf of public sector enterprises during the current year (2003-04).
However, for the fist time in many years, the government has not included in the Economic Survey estimates as to how much cost of guarantees it would have to pay during the next year i.e. 2004-05.
The economic survey 2003-04 says the policy of limiting guarantees and the risk analysis of contingent liabilities has been institutionalised. During 2003-04, the government has issued guarantees equivalent to Rs18.71 billion that is 22.4 per cent lower than 2002-03.
Additionally, the government's Fiscal Responsibility Law, pending in the National Assembly, proposes specific limits on contractually binding guarantees (i.e. explicit contingent liabilities) including those in rupee lending, bonds, rates of return, output purchase agreements and other claims that may threaten the future fiscal stance of the government.
Contingent liabilities are costs, which the government would have to pay if a particular event occurs. These are obligations triggered by a discrete but uncertain event and are associated with major hidden fiscal risks. A common example of a contingent liability is a government-guaranteed loan.
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.
Nevertheless, government guarantees and financing through government guaranteed institutions are more politically attractive than budget support even if they are more expensive later.
The budgetary cost of these legal obligations during 2001-02 stood at Rs20.88 billion, in 2002-03 Rs24.12 billion and are estimated at Rs18.71 billion during 2003-04.
These comprise payments made on account of contractual guarantees issued on Ghee Corporation of Pakistan (GCP), Rice Export Corporation of Pakistan (RECP), Trading Corporation of Pakistan (TCP), Cotton Export Corporation (CEC) and Saindak bonds; Pakistan Steel Mills Corporation's liability payments contractually assumed by the government; payments to oil refineries on account of guaranteed rates of return; and payments to Fauji Fertilizer Company Bin Qasim on account of 1989 investment policy pertaining to the fertilizer industry.Implicit contingent liabilities are not officially recognized until a failure occurs. The triggering event, the amount at risk, and the required government outlay are uncertain. These include the government's quasi-fiscal activities including mainly the bail-outs of strategically important State Owned Enterprises and the non-performing loans of the banking sector.
Through robust financial sector reforms, prudent monetary management and the strengthening of the State Bank of Pakistan's regulatory role, the non-performing loans of the banking sector stand at Rs220 billion as of March 2004. These were Rs258 billion as on June 30, 2002 and Rs279 billion as on June 30, 2001 respectively.
The Water and Power Development Authority (Wapda), the Karachi Electricity Supply Corporation (KESC), and Pakistan Railways have been the largest drain on the budget.