Government guarantees issued to food trading companies and provincial governments are not covered under the Fiscal Responsibility Debt Limitation Act 2005, a practice that is understating volume of public debt, the central bank said on Tuesday.
The guarantees are issued on commodity financing loans taken by the Trading Corporation of Pakistan (TCP), Pakistan Agriculture Storage and Services Company (PASSCO) and provincial governments, but they are never included in the limit of two per cent of the GDP imposed by law, it said.
“Such activities not only understate the volume of the public debt stock and pose a risk of increasing future liabilities, but also potentially crowed out private investment,” it said.
New guarantees issued during July-March 2009/10 reached Rs177.9 billion, 1.18 per cent of the GDP, less than the full-year limit imposed by the act, the central bank said.
ìThe volume of government guarantees issued during fiscal 2009 reached Rs274.3 billion that has breached the limit imposed by FRDL Act 2005.”
The SBP said that countries with higher and persistent budget deficits have serious implications of government guarantees for fiscal outlook of the country.
“In case of Pakistan, government guarantees normally exist in the form of contingent liabilities.
These liabilities are not recognised as direct, as the actual cost of the government is linked with the occurrence of any particular event in future,” it said.
The possibility of default can increase as government normally covers all risks.
Water and Power Development Authority (WAPDA) remains major recipient among the guarantees issued during the period as the government provided guarantees of term financing certificates (TFCs) issued by Pakistan Electric Power Company (PEPCO) in settling the circular debt.
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