SOEs, fiscal discipline & reforms

Despite a wave of privatization in the last 3 decades, SOEs still contribute significantly to the economic growth of both developed and developing countries (Robinett 2006). For example, SOEs account for about 30% of gross domestic product (GDP) in the People’s Republic of China (PRC), 38% in Vietnam, 25% in India and Thailand, and about 15% in Malaysia and Singapore (OECD 2010).

In 2005, they accounted for more than 50% of the GDP in Tajikistan, Turkmenistan, and Uzbekistan and about 20%–40% in other Central Asian countries respectively (World Bank Group 2014a).

If we include those firms in which the state owns more than 50% of their total shares, directly and indirectly, at the national or subnational level, then 10% of the world’s largest firms (204 enterprises) could be classified as SOEs with a net worth amounting to $3.6 trillion.

Figure 1 details the equally weighted shares of SOEs in assets, sales, and market value of the top 10 firms in the selected countries to show which countries have the highest presence of SOEs among their firms.

SOEs presence in rapidly developing countries such as the PRC (96%), the United Arab Emirates (88%), the Russian Federation (81%), Indonesia (69%), and Malaysia (68%) is higher compared with more developed countries such as Germany (11%) and Finland (13%) (Büge et al. 2013)—Efficient Management of State-Owned Enterprises: Challenges and Opportunities [Policy Brief No. 2017-4 (December), ADB Institute] by Chul Ju Kim and Zulfiqar Ali.

The federal government’s primary functions include trade regulation, taxation, war declaration, and policymaking. Parliament, as the supreme authority, legislates for the executive and judiciary, ensuring separation of powers for efficient functioning.

However, in many regions of the world, governments oversee business entities, particularly in less developed nations, categorizing them as State-Owned Enterprises (SOEs). These SOEs typically engage in infrastructure projects across various sectors, including railways, telecommunications, oil and gas, financial institutions, housing, and more.

According to above-quoted policy brief by the Asian Development Bank Institute (ADBI), the world’s 13 largest oil companies, controlling approximately 75% of global oil production, are SOEs. Looking at the operations of SOEs in our neighboring country India, an article, India’s State-Owned Enterprises, published in the International Monetary Fund’s e-Library points out: “As of end-FY2019/20, central government owned 366 SOEs, out of which 256 SOEs were operational (or reporting operational income), 96 SOEs were under construction (or reporting no operational income) and 14 SOEs were under closure or liquidation”. The article further reveals that approximately 40% of non-strategic sector SOEs are running at a loss and could be considered a priority for privatization or closure.

Pakistan has around 204 SOEs as per the latest publication of Ministry of Finance’s Economic Adviser’s Wing, Fiscal Risk Statement (FY 2023-24). These entities are involved in diverse sectors providing goods and services.

In 2019, these SOEs generated total revenue of approximately Rs 4 trillion, with assets valued at Rs 19 trillion. They also employ 145,270 individuals, constituting nearly 0.8% of the Pakistan’s workforce. However, these entities collectively incurred losses of around Rs 143 billion.

While many countries are implementing privatization policies for SOEs, Pakistan remains in debate over the issue without officially announcing any plans for disinvesting in such entities. Meanwhile, the government continues to inject substantial sums of money in the form of subsidies and grants each year to sustain the operations of these unprofitable entities.

Pakistan’s Caretaker Prime Minister presided over an important meeting focused on restructuring Pakistan International Airlines (PIA) and directed relevant authorities to provide a comprehensive restructuring plan for the national airline.

While the results of this plan and the recommendations put forth by authorities remain uncertain, it is clear that the mismanagement of fiscal affairs is imposing a significant financial burden on the country and its people, which can be ascertained from the recently issued Pakistan Fiscal Operations figures for the July 1 2022 to June 30, 2023.

The report confirms the inability of economic managers to conduct financial operations with due diligence. The budget deficit continues to grow with each passing year, entangling Pakistan in an unrelenting cycle of debt.

Even if we exclude the impact of debt servicing, our revenues fall short of covering other expenses, implying that all these are met from borrowed funds.

At the close of the fiscal year (FY) 2022-23, Pakistan recorded a budget deficit of Rs 6.52 trillion, equivalent to 7.7% of the GDP, a slight decrease from the previous year’s 7.9% of GDP. However, in absolute figures, the budget deficit surged by a substantial 24%, or Rs 1.26 trillion, within just one year.

Due to this bleak scenario, the primary balance registered a negative Rs 690 billion in FY 2023. Encouragingly, Pakistan achieved a noteworthy reduction of Rs 1.3 trillion or 67% year-on-year in its debt portfolio at the primary balance level during FY 2023.

According to the Fiscal Operation reportthe primary deficit, which stood at 3.1% of GDP in FY2022, was reduced to a more manageable level of 0.8% of GDP in FY 2023. This improvement has created some fiscal room, and with continued efforts we can attain a primary surplus, representing the fundamental level of financial discipline.

Upon a closer review, it is encouraging to note that at the consolidated level, the government successfully attained an overall primary surplus of Rs 503 billion. However, by end of the third quarter of FY 2023, overall budget’s balance showed a negative figure of Rs 3.07 trillion. Yet, in the last quarter of FY 2023, primary surplus turned into primary deficit, with latter recording a primary deficit of Rs 1.1 trillion.

The budget deficit in last quarter of FY 2023 surged to nearly 112% of the cumulative figures from July 2022 to March 2023. Pakistan’s budget deficit for the initial nine months amounted to approximately Rs 3 trillion, but in Q4 FY23 alone, it registered a substantial increase of Rs 3.4 trillion. It’s worth noting that in the latest budget documents released in June 2023, revised estimate for primary deficit in FY23 was Rs 421 billion.

However, according to the Ministry of Finance’s recent update, there was a primary balance overrun of Rs 690 billion, marking an increase of Rs 269 billion, which is 64% higher than the revised estimates for FY 2023 shared earlier in June of the same year. Contrastingly, according to the budget document from the previous year, a surplus of Rs 153 billion was projected. This highlights the inadequacies in financial planning at ministerial level.

It is imperative to understand that fiscal discipline cannot be achieved and sustained without initiating structural reforms. In the 2023 budget, the government extended substantial subsidies and grants to loss-making entities, which, in turn, are not only failing to make positive contribution but are also incurring significant losses. We must maintain fiscal discipline and establish controls to create fiscal space to extend relief to the masses.

Faced with daunting economic challenges posing a serious threat to viability of state, we should not waste any further time to implement structural reforms for good governance, streamline bureaucratic procedures, curb unproductive government expenditures, expand the tax base, foster public-private partnerships, and reallocate resources to critical sectors e.g. healthcare, education, and infrastructure development to stimulate higher and sustainable growth and inclusive development.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023