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Pakistan’s state-run firms worst in Asia: World Bank

ISLAMABAD: Pakistan’s state-owned enterprises (SOEs) are the worst in South Asia, and their total losses are expanding faster than their assets. As a result, a sizable annual drain on the government’s limited resources occurs, and the sovereign is placed at serious risk.

According to the World Bank, who recommended a comprehensive reform programme to halt the trend, they collectively consume more than Rs458bn in public funds each year to stay afloat as their combined loans and guarantees increased to almost 10% of GDP (Rs5.4tr) in FY21 from 3.1pc of GDP or Rs1.05tr in 2016.

The World Bank stated that these firms “impose a significant fiscal drain and pose a substantial financial risk on the federal government” and that they have been losing money since FY16, with losses averaging 0.5 percent of GDP annually from FY16 to FY20. The Public Expenditure Review 2023 stated that “Pakistan’s federal SOEs have been found to be the least profitable in the South Asia region,” adding that the cumulative losses had become significant and reached 3.1 percent of GDP in FY20 as a result of the ongoing losses.

The federal government has been giving the SOEs direct fiscal support in the form of subsidies, loans, and equity injections totaling 1.4 percent of GDP in FY21 to compensate the losses. In addition to providing direct assistance, the government has been guaranteeing loans taken out by commercial banks by SOEs. The outstanding stock of guarantees and government loans to SOEs, which is how the federal government defines its exposure to SOEs, has been steadily rising and accounted for 9.7% of GDP in FY21.

The overall fiscal exposure to domestic and foreign loans and guarantees had been rising quickly, according to the report, with annual increase averaging 42.9 percent during the period FY2016–2021. But because of potential exposure brought on by promises, a thorough risk evaluation was necessary. The K-3 and K-4 nuclear power plants were the subject of 32% of the remaining guarantees provided through the Pakistan Atomic Energy Commission (PAEC) in FY 2021. According to the data that is currently available, guarantees made up the majority of fiscal exposure in FY21 (44.4 percent of the total exposure), followed by cash development loans (36 percent) and foreign loans (19.6 percent).

Since FY16, the amount of government guarantees still owed to SOEs has more than doubled. The stock of guarantees used to finance the circular debt is above 75% against the electricity sector. From 2.2 percent of GDP in FY16 to 4.5 percent of GDP in FY22, the stock of outstanding guarantees from the Federal Government to federal commercial SOEs has increased.

According to the research, individual SOE success is mostly determined by sector performance. Although the major causes of SOE losses vary, they are often associated with unresolved corporate governance difficulties, sector restrictions, an underestimate of the cost of provision in comprehensive restructuring, and insufficient current subsidies.

An review of SOE portfolios revealed that sector strategies and the extent of operational autonomy granted by the Board of Directors and senior management influenced individual SOE performance. SOE losses are concentrated in the power, infrastructure, and transportation sectors, and they surpass revenues from profitable SOEs in aggregate. Despite the fact that a significant number of commercial SOEs made profits in FY20, they were focused in the oil and gas industry.

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