The fate of Rs200 billion power sector Sukuk – to park circular debt in another company, and Rs20 billion market support fund hangs in balance, as the Ministry of Finance is unable to issue sovereign guarantees against those debt instruments. The IMF has put a ceiling on sovereign guarantees which have increased disproportionately in the past few years.
Back in 2013, the sovereign guarantees quantum was Rs626 billion –Rs355 billion domestic and Rs271 billion foreign. The foreign currency guarantees kept on declining and were standing at Rs76 billion in Mar19. However, Ishaq Dar was generous on issuing fresh domestic guarantees which increased by 3.25 times to Rs1,151 billion. The speed picked up in FY17 and FY18 where new guarantees issued per annum were more than Rs300 billion or 1 percent of GDP.
The overall guarantees stood at Rs1,265 billion as of Mar19, and IMF has projected the level at Rs1,611 at June19 and that number is not permitted to increase any further in FY20. The higher number of Jun19 could be due to guarantee of Rs200 billion on power sector Sukuk issued couple of months back. Now, the Fund is not allowing any further issuance.
According to sources, recently when a banker went to Secretary Finance for guarantee issuance on a certain instrument, he was rerouted to IMF’s country representative in Islamabad, and the lady showed red flag to the banker, and he flew back empty-handed to Karachi. That is the story of any fresh loan to be issued to PSEs where banks are keen to have sovereign guarantees by passing on the risk to the government of Pakistan while the returns are to be pocketed by financial institutions.
The party is over now. Sovereign guaranteed loans are eligible for SLR, per part limit does not apply on them, and banks do not have to provide for delayed payments. What IMF is saying is that there is no free lunch for banks.
The implication of no fresh issue of sovereign guarantees is on the resolution of circular debt and further falling sentiments in the stock market to date. There could be more issues surfacing soon. In case of power sector, the circular debt including PHPL liabilities is standing around Rs1,600 billion and fresh issue of Rs200 billion would have shifted some of the loan to PHPL without actually settling the debt
The issue would improve the cash flow situation of PSO, SNGPL, and in turn other companies (including IPPs, E&P) in the energy sector value chain. And the interest cost is to be paid by consumers. That had happened in 2013 and has been the norm since. The real resolution of circular debt is nowhere in sight, and now another debt of RLNG is building up as well.
The other stuck issue is of Rs20 billion so called bailout package promised by Finance Minister to stock market players a few weeks back The market pundits are showing lucrative valuation to state owned entities, and reminding government that these companies made good money when these invested in a few PSEs back in 2009. One may wonder why these stock market gurus do not invest themselves when the market valuations are so cheap.
Anyhow, the quasi fiscal debt is growing and that is becoming a concern. The risk is hidden in contingent liabilities which can create a systematic risk in case of default. The IMF does not want MoF to have any further risk exposure. According to IMF report, the stock of power sector circular debt is over 4 percent of GDP while the newly emerged gas sector debt is around 0.5 percent of GDP. Beyond energy sector, three big PSEs (PIA, PSM and PR) accumulated losses are over 2 percent of GDP. The overall quantum is around 6.5-7 percent of GDP. The IMF is saying ‘no more’.
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