EDITORIAL: The report on state-owned entities (SOEs) July-2023 to June-2024 provides extremely disturbing data that should compel the government to immediately take appropriate measures to plug this loophole with trillions of rupees injected into these entities every year, which is exacerbating the fiscal space available.
The report notes the following: “the Government of Pakistan extended fiscal support totaling 1,586 billion rupees on IFRS compliant accrual basis of financial reporting.
This was divided into 367 billion rupees in grants, 782 billion rupees in subsidies, 336 billion rupees in loans and 99 billion rupees in equity injections.
This was 13 percent of federal budget receipts.“ This reflects the appalling performance of sectors particularly the National Highway Authority (NHA), the power sector (distribution, oil and gas), Pakistan Railways and financial sector (development finance institutions and insurance).
The risks and mitigation recommendations are the standard normal ones that were identified in the past and not implemented in letter and spirit, a fact that indicates that out of the box recommendations ought to have been further explored.
The suggested reforms in NHA are to explore infrastructure bonds and private public partnership models; however, the two critical conditions that may attract private sector investment are: (i) a climate conducive to investment, which simply does not exist today, given that the country’s rating by the three international rating agencies remains in the junk bond category in spite of the upgrade last year, which did not take the country towards a less vulnerable position; and (ii) domestic investment climate remains bleak, given that the large scale manufacturing sector was in the negative category when last calculated in November 2024.
And yet another relevant factor is the perception of high levels of corruption within the sector that must be mitigated by enforcing all public sector entities to respond to and implement recommendations of the Auditor General of Pakistan.
The power sector distribution companies face credit risks, which the report recommends may be resolved by diversifying the energy mix to reduce hydrocarbon dependency (a solution geared to reducing demand from those independent power producers who use hydrocarbons as a major input but that in turn would increase capacity payments – a factor that would also be relevant with the other suggestion in the report notably to incorporate renewable energy into the portfolio) with no mention of the need to end the massive annual subsidies for tariff equalization, a major source of leakage from the system.
And the major risk associated with oil and gas inflows is a rise in their international prices and/or a rupee depreciation; however, not included in the mitigation proposal is the need to undertake structural tax reforms to reduce reliance on taxes on utilities and increase reliance on direct taxes based on the ability to pay principle.
DFIs’ high concentration in government securities constitutes a market risk. Such allocation, according to the Report, reduces DFIs’ capacity for lending and equity investments, limiting their potential to drive economic growth.
Mitigation measures recommended are (i) encourage diversified portfolios (which is perhaps a politically careful way of stating that the government must stop arm-twisting DFIs to purchase its securities); and (ii) capital infusions whose source is not identified because the public and private sectors are at present experiencing a dearth of capital.
Pakistan Railways is encouraged to diversify its revenue sources and modernise its rolling stock and infrastructure – easier said than done at a time when fiscal space is extremely narrow and the government is implementing severely contractionary monetary and fiscal policies that are conditions for the ongoing International Monetary Fund programme.
And the key recommendations of the report can therefore be easily dismissed as being unrealistic in the short- to medium-term notably: (i) strengthen financial controls and governance policies; (ii) diversify energy portfolios to include renewable sources; (iii) modernise infrastructure and adopt advanced technologies; and (iv) enhance transparency in financial reporting and regulatory compliance.
Copyright Business Recorder, 2025
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