An official of the Ministry of Finance has indicated that 1.5 trillion rupee liabilities would be parked outside the budget 2018-19 on condition of strict anonymity. This is an extremely disturbing, though not surprising, revelation. It is critical to note that while the main risk associated with contingent liabilities, off budget liabilities, is the "fiscal cost after their occurrence" as defined by the State Bank of Pakistan, yet Pakistani governments have also parked existing liabilities, as opposed to those that have yet to be incurred, outside the budget.
During the 6.64 billion dollar Extended Fund Facility (September 2013-2016) fully disbursed by the International Monetary Fund (IMF) the government sought and was granted what it maintained year after year a one-off exemption from including the power sector liabilities parked in the Power Holding Private Limited (PHPL) in the budget. The amount parked in the PHPL has steadily increased since 2010, when it was first set up, on which interest is paid through a rising surcharge levied on electricity consumers. The government has never made any repayment since PHPL's inception and fresh loans have been periodically incurred to pay the interest charges which were at the rate of Kibor plus 2 percent (with a rebate of one percent on timely payments). Inexplicably in 2016, the government negotiated a higher interest rate on 25 billion rupees for PHPL relative to 25 billion rupees for Wapda. The first post-programme monitoring discussion report uploaded by the IMF dated March 2018 noted that "accumulation of new payment arrears of power distribution companies which was brought to near zero at end fiscal year 2015-16 - has resumed, reaching 193 billion rupees (0.5 percent of GDP) since July 2016 with an accumulated stock of such arrears of 514 billion rupees (1.5 percent of GDP) by end December 2017."
It is equally disturbing to note that circular debt is also being fuelled in the imported Liquefied Natural Gas (LNG) sector indicative of poor performance of this sub-sector as well. The IMF report notes that "inter-agency arrears in the gas sector, although still low, have been rising, reflecting limitations in the current cross subsidization arrangement between the two publicly-owned gas companies and delays in updating gas tariffs."
Liabilities due to other public sector entities (PSEs), as per the IMF report, indicate that "the combined accumulated losses by these PSEs now exceed 1.2 trillion rupees (4 percent of GDP) which could eventually lead to sizeable demand for budgetary resources." The Finance Ministry's official's revelation that 1.5 trillion rupees of liabilities (existing and not contingent liabilities) would be parked outside the budget reveals that the extent of understatement of the projected budget deficit would be considerable.
The Abbasi-led administration's tax amnesty scheme projected to generate 5 to 6 billion dollars has also stalled with beneficiaries adopting a wait-and-see policy since Chief Justice Saqib Nisar's statement during the hearing of the case relating to state land on 11 April, that the court will examine the amnesty scheme; and gave the direction to the court office to fix the case of Pakistanis having assets and foreign accounts abroad for hearing. It is unclear whether the court would begin hearing before the expiry of the scheme though the reduction in income tax rates, expected to reduce collections by 80 to 90 billion rupees, would be applicable from 1 July 2018 if made part of the Finance Bill 2018.
The Fiscal Responsibility and Debt Limitation Act 2005 places a ceiling of 60 percent of GDP on debt-to-GDP ratio (currently at near 70 percent though the government acknowledges 67.7 percent which has been achieved through redefining debt) and a ceiling of 2 percent of GDP on contingent liabilities which at present are at 2.5 percent of GDP. The policy of placing a whopping 1.5 trillion rupees of total liabilities outside the budget would therefore further degrade these figures with a consequent impact on the country's ability to repay loans, as well as through raising domestic inflationary pressures.
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