Contingent Liabilities of Federal Government

The Contingent Liabilities of Federal Government is part of the federal budget for FY 2020-21. This page reproduces the text of its 2 PDF pages, extracted automatically from the official PDF published by the Finance Division, Government of Pakistan.

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            Statement of Contingent Liabilities
             This statement is prepared to comply with section 4, sub-section 3 (a) of
Public Finance Management Act, 2019, which states that Annual Budget Statement shall
also contain statement of contingent liabilities of the Federal Government. As per section
2(h) of the Act, ‘contingent liability’ is defined as ‘a financial liability that may arise or come
into being if one or more events occur’.
2.           Contingent liabilities are generally off-budget transactions. Quantification
and disclosure of such liabilities is important to present a holistic view of government’s
fiscal position. Such liabilities unveil the hidden risks associated with obligations that the
government has made outside the budget.
3.           Federal Government’s contingent liabilities are primarily guarantees issued
on behalf of loss-making Public Sector Enterprises (PSEs). The sovereign guarantees
are normally extended  to improve  financial  viability  of new  projects  or  activities
undertaken by PSEs for social and economic benefits. Through government sovereign
guarantees, PSEs are able to borrow finances at lower costs or on more favourable terms.
In some cases, issuance of sovereign guarantees is a precondition for concessional loans
from bilateral and multi-lateral.
4.         The volume of new government guarantees issued during a financial year
is limited under Fiscal Responsibility and Debt Limitation Act which stipulates that the
government shall not give guarantees aggregating to an amount exceeding two percent
of the GDP in any financial year including those for rupee lending, rate of return, outright
purchase agreements and other claims and commitments provided the renewal of
existing guarantees shall be considered as issuing a new guarantee.
5.    During July-March 2019-20, the government issued fresh/rollover guarantees
aggregating to Rs 115 billion or 0.3 percent of GDP. Outstanding stock of guarantees as
at end of March 2020 amounted to Rs 1,890 billion, details of which are as follows:
Table 1: Sovereign Guarantees extended by Federal Government by end March ‘20
                                                 Drawn (Rs billion)
  Domestic                                                 1,412
   External                                             478
   Total                                                     1,890
   Memo: External (US$ in Million): 2,868 and Exchange Rate on 31st March: 167

6.           Sector-wise share of the above guarantees is as follows:

                 Table 2: Sector-wise share of guarantees - Rs billion
              Sector            Drawn (Rs billion)  % Share

  Power Sector                              1,113               59%
  Aviation                               199                11%
  Financial                              66                3%
  Manufacturing                          50                3%
  Oil and Gas                            40                2%
  Other                                 421                22%
  Total                                     1,890                100%

7.          Guarantees issued against commodity operations are not included in the
stipulated limit of two percent of GDP as the loans are secured against the underlying
commodity and are essentially self-liquidating. Thus, these should not create a long-term
liability for the government. The quantum of these guarantees depends on the supply-
demand gap of various commodities, their price stabilisation objectives, volume procured,
and domestic and international prices.
8.    The  guarantees were  issued  against  the commodity  financing  operations
undertaken by Trading Corporation of Pakistan (TCP), Pakistan Agricultural Storage and
Services Corporation (PASSCO), and provincial governments. The outstanding stock of
commodity operations amounted to Rs 649.3 billion as at end March 2020.