Islamabad: As guarantees stock touches Rs 1.6 trillion mark to secure domestic and foreign loans, finance division has proposed new mechanism to economic coordination committee (ECC) to increase its role in extending guarantees against loans in future.
Finance Division’s guarantees stock stand at Rs 1.6 trillion as of December 2019 provided mainly for water, energy projects and PIAC.
Ministry of Finance is mandated to issue local and foreign guarantees to mobilize commercial and bilateral financing for development projects and state owned companies to meet their liquidities requirement.
Sovereign guarantees expose the government to the financial risk emanating from contingent nature of these liabilities and government remains dependent on the financial health of the borrowing entities. Internationally many countries have developed comprehensive risk of evaluation methodologies to evaluate fresh issuance and carry continuous monitoring of public sector entities availing such guarantee.
Prudent risk management of guarantees entails identifying and quantifying key risk factors and ensuring the mitigating measures are in place. To carry out any risk analysis, availability and authenticity of financial number remains the pre-requisite risk.
However, any such analysis, remains limited in its depth and scope because of un-availability of ‘audited financial reports’ and viable business plan in most of cases of government guarantees.
With a view to address risk, the finance division has proposed the prior action in the reform matrix supported by World Bank under the ‘Resilient Institutions for Sustainable Economy’ (RISE) Program.
Presently, the role of finance division is limited to finalization terms and conditions of loans to be secured under government guarantees. However, as a step forward towards fiscal consolidation and debt sustainability, Finance Division plans to review the entire portfolio of government guarantees vis-à-vis risk associated with issuance of these guarantees. The finance division has proposed new mechanism.