Fiscal support to SOEs surges to Rs5.7tr

October 21, 2024 (MLN): State-owned enterprises (SOEs) in Pakistan are posing a significant challenge, consistently reporting net losses for the last eight years. These losses have required steady fiscal support from the government, which reached a staggering Rs5.7 trillion or about 1.4% of GDP by FY23.

According to the State Bank of Pakistan Annual Report 2023-2024, there is an urgent need to reform SOEs in Pakistan, given their large economic footprint, particularly the fiscal impact.

Pakistan trails far behind other countries in the crucial pursuit of successful SOE reforms, the central bank noted in the report.

The reforms have followed an intermittent path, with the process either rushed due to external push, or frequently stalled due to lack of political consensus.

As a result, it remains a work in progress. At present, the SOEs in Pakistan pose a significant challenge, consistently posting net losses for the last eight years, requiring steady fiscal support from the government.

Between FY16 and FY23, the accumulative fiscal support, including subsidies grants, loans, and equity injections, reached a whopping Rs5.7tr, about an average of 1.4% of GDP over this period.

Furthermore, contingent liabilities in the form of government guarantees, are creating additional veiled risks to fiscal sustainability.

The untenable nature of this dependency as well as the deteriorating quality of goods and services of several SOEs makes their reform imperative for economic stability.

Understandably, reforming SOEs is a long drawn, complex and difficult process, including management of labour issues, such as redundancies, and implementation of hard budgets.

However, the daunting challenges that SOEs pose can potentially be a germinating point for garnering political consensus on homegrown push for SOE reforms, especially as potential rationalising of SOEs workforce may not be large given their relatively small share in total employment.

To this end, creating awareness, open and transparent deliberations on policy options in parliament and media, can potentially allay public concerns and help remove the roadblocks to reforms, the SBP noted.

It is, however, essential that policymakers frame SOE reform within the broader context of ensuring well-functioning competitive markets, effective regulation and improvements to the institutional environment.

Conflating standalone privatisation with SOE reforms, risks repeating the mistakes of Pakistan’s historical reform efforts when the aforementioned essential elements of SOE reforms were ignored in the pursuit of short-term privatisation goals.

Indeed, without addressing the foundational reforms to SOE ecosystem reduces SOE reform to a mere ownership swap, leaving end consumers to bear the brunt of continued inefficiencies.

In this regard, the recent government initiatives, namely the enactment of the SOE Governance and Ownership Act 2023 and SOE Ownership and Management Policy 2023, marks a notable shift from the government’s earlier approach to SOE reform efforts.

The establishment of a permanent Cabinet Committee on SOEs with clearly defined terms of reference; the formation of a Central Monitoring Unit for evaluating SOEs’ performance; the directives to conduct competitive sectoral assessments, ensuring competitive neutrality, mitigating the role of line ministry in micromanaging the SOEs; and adopting best practices for SOEs’ corporate governance, are some of the important steps in the right direction.

The report noted that the impact of these positive measures depend on the degree of commitment with which these are implemented.

Lastly, strengthening institutional arrangements to generate political consensus and wider public support alongside preparation of mitigation framework for managing prospective labour issues are paramount lest the absence of these may stall the SOE reform process again.

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