NationalVOLUME 19 ISSUE # 13

Lingering uncertainties

Pakistan grapples with the ongoing struggle to privatize its loss-making Public Sector Enterprises (PSEs), a challenge that has thwarted successive governments despite pressure from international bodies like the IMF. The State Bank of Pakistan’s recent data sheds light on a concerning surge in debts and liabilities, raising questions about the effectiveness of attempts to alleviate the financial burden on these entities.

Pakistan’s creditworthiness has faced a substantial setback as major rating agencies downgraded the nation’s ratings amid prolonged political and economic crises. While there are indications of economic improvement, lingering uncertainties post-elections continue to raise concerns among the populace.

A survey reveals that 70% of Pakistanis perceive a deteriorating economy, with half struggling to make ends meet on their current incomes. Despite this, S&P suggests that a government enjoying popular support can collaborate effectively with key institutions, enhancing its chances of securing IMF financing. Currently holding a CCC+ rating, one step below the B category, Pakistan is deemed vulnerable to default.

The potential for a positive shift in policies, aimed at boosting investor confidence and curbing inflation, could bolster fiscal and external metrics, potentially improving the ratings. The imminent conclusion of the IMF bailout package in March will exert pressure on the new government to swiftly secure additional financing.

On December 22, S&P Global Ratings downgraded Pakistan’s long-term sovereign credit rating from ‘B-‘ to ‘CCC+’ and the short-term rating from ‘B’ to ‘C,’ citing dwindling foreign reserves and heightened political risks. Fitch, Moody’s, and S&P, citing poor foreign exchange reserves, collectively lowered Pakistan’s ratings.

Analysts widely anticipated the need for another IMF bailout to sustain growth and prevent a recurrence of the default-like situation experienced in July the previous year. Moody’s emphasizes the imperative for the newly-elected government to establish a comprehensive long-term financing plan to meet substantial external debt obligations in the coming years. The expiration of the current IMF program in April 2024 necessitates negotiations for a new program, crucial for securing loans from other partners.

The analyst at Moody’s, Grace Lim, underscores that even under a new IMF program, the government’s commitment to implementing and sustaining potentially unpopular but necessary reforms, particularly in revenue-raising measures, will be rigorously tested. The heavily indebted government faces escalating debts and liabilities from Public Sector Enterprises, requiring larger budget allocations for repayments.

Despite continuous efforts by successive governments to divest loss-making Public Sector Enterprises (PSEs), none have succeeded in doing so, even under persistent pressure from the IMF to privatize these entities. Data from the State Bank of Pakistan reveals a concerning 24.1% year-on-year increase in the debts and liabilities of PSEs, reaching Rs2,332.9 billion in September.

During FY23, these PSEs experienced a substantial 32.7% or Rs573.6 billion rise in debt and liabilities, compared to a more moderate 6.5% growth in FY22. Loss-making PSEs, including PIA, Wapda, and others, have posed challenges for the government. However, the first quarter of FY24 witnessed a relatively modest increase of Rs4.8 billion in PSE debts, indicating the government’s attention to the growing burden.

Despite efforts by the caretaker government, which extended beyond its mandate, privatization of any loss-making entities has proven unsuccessful. The PSE debt, which was Rs1,393.4 billion in June 2022, rose to Rs1,687.2 billion in June and slightly increased to Rs1,698.1 billion in September. Liabilities also surged to Rs640.9 billion in June 2023 from Rs361.1 billion in the same month the previous year.

In the first quarter of FY24, liabilities decreased by Rs6.2 billion to Rs634.7 billion. The data indicates that the debts and liabilities till June accounted for 2.7% of the gross domestic product (GDP). Notably, the top three loss-making entities were PIA with debts and liabilities of Rs180.6 billion till September 2023, followed by Wapda at Rs92.6 billion and Pakistan Steel at Rs40.3 billion. The data did not disclose details about other loss-making PSEs, despite significant increases in their debts and liabilities, rising to Rs1,378.7 billion in September from Rs1,089.7 billion in June 2022.

Efforts to sell off some PSEs have been met with limited interest from investors, who are generally unattracted to loss-making entities. However, a comprehensive strategy to address and reduce losses is lacking, preventing the necessary corrections for entities like PIA. The national airline continues to lose ground to private operators. Despite discussions at the government’s top levels regarding the revival of Pakistan Steel, no concrete steps have been taken thus far.

In conclusion, the journey to privatize Pakistan’s loss-making PSEs remains arduous, with the latest data illustrating a persistent uphill battle. The country’s efforts, extending beyond government mandates, have yet to yield success, leaving crucial entities like PIA, Wapda, and Pakistan Steel burdened with escalating debts. As discussions continue at the governmental level, the lack of a comprehensive strategy raises concerns about the prospects for revitalizing these enterprises and attracting investors. Addressing these challenges requires a concerted effort and strategic planning to navigate the complexities and pave the way for a sustainable solution.