Finance Minister Ishaq Dar’s team claims that a plan is in the pipeline to ward off the external front crisis.

Besides tweaking the fiscal policy framework to curtail the trade deficit by promoting exports and suppressing imports, the government intends to float bond/sukuk on the global market as early as next month.

Some experts recently accused the government of lacking the expertise and talent to successfully conduct road shows in financial capitals of the world in the run-up to the bond launch.

To shore up reserves to cover for steady debt repayment, finance vital imports and keep a buffer for contingent liabilities, the government intends to go to the international capital market

Ruling out the possibility of knocking at the IMF’s door for a bailout in the foreseeable future, the PML-N leadership regretted irresponsible projections that overstate the country’s economic weaknesses and underplay its strengths. They thought it would compromise Pakistan’s position in global capitals where the Pakistan bond is to be launched.

Dispelling the impression of paralysis in economic ministries, the leadership asserted that a pragmatic plan is in place to steer the economy, dodging both perceived and real dangers to the sustainability of the growth momentum and the management of domestic and external liabilities.

While the debt obligations and import payments get public attention, the mounting contingent liabilities (CL) are treated as a side issue. The latest annual report of the State Bank of Pakistan (SBP), however, took a note of the quantum/trend of CL and cautioned the government in this regard.

By definition, CL are not budgeted but seriously drain meagre resources when they occur. In Pakistan, bleeding commercial public entities (such as Pakistan Steel Mills and Wapda) appear to be perpetually dependent on public funding for survival but their requirements are not accounted for in the budget and are clubbed with other heads under CL.

The SBP also reported that the cost of new guarantees shot up to Rs586 billion in 2016-17 from the annual five-year average of Rs143bn. By June, the outstanding stock of CL was 936.9bn, or 2.9 per cent of GDP. About 90pc of the guarantees were on domestic loans.

“The circular debt of public sector enterprises is troubling enough. Natural calamities are beyond control but the calling of sovereign guarantees by foreign companies should have made policymakers more discreet,” said an expert. “Unfortunately, throwing caution to the wind, the current economic team has proven to be remarkably liberal with sovereign guarantees. In its zest to attract foreign investment it bends backwards to accommodate.”

“Yes, risks are high in Pakistan but so are the returns. To moderate risks of overseas investors the government offered sovereign guarantees left, right and centre but did little to create a buffer to absorb the shock in case a guarantee is called,” he added.

Senior sources in the government agreed that the gains of policy revisions, such as higher regulatory duty on imports and export-boosting measures, will take time to materialise while the external front situation demands an immediate dollar injection.

A careful estimation of the collective impact of fiscal policy adjustments have been estimated to be about $100 million per month during the October-December quarter.

“The government needs $18bn in the current fiscal year to match its needs. The measures initiated thus far signal a change in direction but are not expected to yield sufficient resources,” an analyst told Dawn.

In response to Dawn’s query on options to shore up reserves to cover for steady debt repayment, finance vital imports and keep a buffer for contingent liabilities, the Ministry of Finance emailed its view. It wished the statement be attributed to the ministry’s spokesperson.

“The government of Pakistan intends to go to the international capital market and in that regard the appointment of lead managers for issuance of bond/sukuk is presently under finalisation,” he said.

“The expected timeline for the issuance is November 2017. However, the exact date will be given after appointment of lead managers,” he added. “This impression that the ministry lacks capacity is wrong as presently an experienced team comprising the finance minister, finance secretary and governor State Bank of Pakistan is in place. The team has vast experience of conducting road shows of bond/sukuk in the recent past as well as the experience of working with international financial institutions.”

“The government of Pakistan has recently announced additional policy measures for export promotion and reduction in non-essential imports, in addition to increasing workers’ remittances. These measures are expected to substantially reduce the financing gap for FY18.

“Furthermore, the financing gap will be bridged by official inflows, proceeds from bond/sukuk, strong FDI [foreign direct investment] inflows, and robust inflows on account of private credit relating to ongoing energy sector projects. With these inflows the financing gap will be fully bridged and official reserves maintained at a healthy level,” the written reply concluded.

Earlier, the finance minister deflected criticism on the 6.3pc annual hike in public debt under his watch since 2013. He did not find the increase “exponential”.

Dissecting the aggregate, he was reported to have explained that “a part of debt has come from the IMF’s 2013 balance of payment support programme and repayment of pending instalments of the IMF’s 2011 loan”.

He boasted that the government has been more financially disciplined than any past government. It repaid $12bn external debt in the first three years of its rule till June 2016 for loans contracted by previous governments.

1. Entity-wise detail suggests that loss-making enterprises regularly rely on government guarantees for their day-to-day operations

2. Avoiding contingent liabilities is neither feasible nor a realistic option for the governments. The CLs have to be managed to minimise their fiscal costs and impact on debt sustainability

3. Some of the best practices adopted to manage the risks associated with CLs

Ceiling on stock/flow of contingent liabilities

Pakistan has already adopted this best practice and placed a ceiling on issuance of new guarantees to two per cent of GDP under FRDLA 2005

Parliamentary approval of the contingent liabilities

A number of the OECD countries require parliamentary approval of the loan guarantees. In some countries, this requirement is a part of budget laws or is written in the constitution

Impose limit on financial claims

When the lending is fully backed by government guarantees, the banks have little incentives to carry out due diligence with respect to borrower’s credit worthiness

Contingency reserve fund

Countries secure financing in the form of contingency reserve fund in the budget that could be used to meet calls on contingent liabilities. The size of this fund is small and its usage is restricted to items to calls on CL

Scrutiny through Auditor General of Pakistan

Many countries have supreme audit institutions having responsibilities of oversight and audit of contingent debts. The audit office also examines the fiscal impact of contingent debts

Early caution system

Many countries developed early caution system for the issuance of government guarantees

Published in Dawn, The Business and Finance Weekly, October 23rd, 2017