Sovereign guarantees extended by the federal government for China Pakistan Economic Corridor (CPEC) energy and infrastructure projects may have serious implications on the budget as well as on the economy. Sources revealed that if the government procures electricity from power plants at a higher cost than it sells to the people the difference would be the liability of the government.

The government would have to increase taxes to pay off the liability through a higher allocation for power subsidy. As many as 14 power generation projects are being implemented under the CPEC with over 7000MW: 5000MW projects are to be completed by 2018 and the remaining beyond 2018. The government is said to have extended sovereign guarantees for all these projects.

An official toldBusiness Recorder that sovereign guarantees are debt and an increase would actually raise publicly guaranteed debt, which impacts negatively on the budget in the form of higher fiscal deficit and taxes. When contacted, an official of Finance Ministry said that role of Finance Division is one of approver and it is the line Ministry that submits a proposal seeking sovereign guarantee. Ministry of Planning officials maintain that sovereign guarantees are extended by the government under the law.

Dr Salman Shah, former Advisor to Prime Minister on Finance, said there was a considerable increase in the number of sovereign guarantees as a consequence of CPEC. He added that in 2016 sovereign guarantees amounted to $1.3 billion while in 2012 these guarantees totaled $0.2 billion.

Dr Shah said that if any project fails or is damaged, the state would have to pick up the entire liability which would increase the budget deficit. Economist Dr Ashfaque Hasan Khan concurred and said that sovereign guarantees are part of debt and liabilities. He said that increase in sovereign guarantees actually raises publicly guaranteed debt which impacts negatively on the budget. He said sovereign guarantees increase the budget deficit which ultimately negatively impacts on the general public because it implies raising taxes or imposing new taxes and/or borrowing.

"Sovereign guarantees are included in contingent liabilities and the government pays from the budget which fuels the budget deficit. Public debt is sum of public and publicly guaranteed debt, the IMF loans and short-term debt," he said. He said that sovereign guarantees have increased dramatically due to CPEC.

Copyright Business Recorder, 2017