Govt required to step up efforts aimed at implementing SOE governance framework across all SOEs
ISLAMABAD: Efforts will redouble to fully implement our State-Owned Enterprise (SOE) governance framework across all SOEs, enhance the Sovereign Wealth Fund's (SWF) governance through key legislative amendments, advancing other governance and anti-corruption reforms, gradually relaxing trade barriers, and adopting policies to build climate resilience.
This was pledged in the Letter of Intent dated 24 April 2025 signed off by the two economic team leaders - Minister for Finance and Governor State Bank of Pakistan (SBP).
The first International Monetary Fund (IMF) staff level report on the ongoing Extended Fund facility program uploaded on its website on Saturday highlighted the significant fiscal and debt sustainability risks posed by contingent liabilities related to SOEs. As of end-December 2024, these liabilities not included within the fiscal perimeter consist of: guarantees related to SOE commodity operations amounting to Rs 4,211 billion; non-guaranteed circular debt in the power and gas sectors at PRs 1,701 billion and PRs 2,842 billion respectively; non-guaranteed SOE debt totalling Rs 141 billion in external and PRs 939 billion in domestic liabilities; and other estimated contingent liabilities of PRs 500 billion. Altogether, these exposures are estimated to equal 9.3 percent of GDP.
The IMF noted that the ceiling on the amount of government guarantees applies to the stock of publicly guaranteed debt for which guarantees have been issued by the central government. This includes both domestic government guarantees, such as those provided to SOEs for commodity operations, and external government guarantees. External government guarantees will be converted into Pakistani rupees at the program exchange rate. The IMF further clarified that if any entity incurs interest arrears on borrowings backed by a guarantee, the guarantee will be evaluated as the higher of the value of the guarantee issued or the total amount owed for the purposes of the Quantitative Performance Criteria (QPC). However, this ceiling does not include guarantees issued by the Ministry of Finance for the State Bank of Pakistan's borrowing from the IMF.
The Fund urged amendments to the SWF that must include (i) clarifying the SWF's mandate and strengthening its governance arrangements and anti-corruption reforms; (ii) requiring transparent and competitive procedures for divestment and procurement; (iii) ensuring that appropriate fiscal safeguards are in place, and (iv) subjecting SWF-SOEs to the SOE Act (end-March 2026 proposed reset SB).
The IMF also urged that SWF's governance processes should ensure transparency, merit-based appointments to its board and advisory committee, and alignment with international best practices. Additionally, the IMF noted that the SWF should operate under fiscal safeguards to prevent financial risks, such as prohibiting the SWF from incurring debt, providing guarantees, or participating in public-private partnerships. Revenues from SWF operations should be directed to the government, and any investments made by the SWF must comply with strict financial risk-return criteria. The execution of these reforms will only proceed once the necessary amendments to the SWF Act are completed, as agreed with the IMF.
The target date for publication of the Governance Diagnostic Assessment (in spite of IMF technical assistance) was missed, the report noted, due to the identification of a focal point and the new target date is end July 2025 to end August.
The report further noted that the government must amend the laws of nine remaining statutory SOEs to bring them in line with the SOE Act (end June 2025) and fully ensuring compliance with the SOE Act (end-June 2025).
The IMF emphasized that it is critical for the new SOE Act and Policy to be fully implemented in order to limit financial losses, improve public services, protect public assets, reduce the state's role in commercial activities, and enhance overall accountability; and acknowledged that some progress has been made, with support from development partners, in establishing business plans and statements of corporate intent, as well as in the publication and auditing of financial statements and annual reports for all SOEs. Progress has also been noted in identifying and contracting public service obligations between SOEs and the government.
However, the IMF emphasized that these efforts need to be accelerated. It recommended the revision of existing operational manuals and the issuance of supplementary guidance notes, in line with recommendations provided by development partners. The IMF also pointed out that greater progress is needed in establishing majority-independent boards, noting that currently only about half of commercial SOEs meet this standard.
The IMF stressed the importance of the Central Monitoring Unit (CMU) continuing to refine its electronic database to ensure full compliance with all reporting requirements under the SOE Act. It also underscored the need for the CMU's reporting to align with the Organization for Economic Co-operation and Development (OECD) best practices to strengthen transparency and accountability across the SOE sector.
The IMF emphasized that advancing structural reforms is critical to generating sustainable and inclusive growth. It noted that the full implementation of the SOE governance framework, and the inclusion of all SOEs within its scope, is essential for improving their performance and reducing associated fiscal risks; and governance frameworks should continue to be strengthened to enhance transparency and accountability and to mitigate risks of undue influence and corruption in policymaking and implementation.
Following through on the SOE reform agenda is critical for scaling back the state's footprint in commercial activities and improving public services, the IMF noted adding that the authorities remain committed to addressing the remaining gaps in the governance framework established in 2023 and implementing it to enhance the viability of SOEs, reduce fiscal liabilities, and decrease the state's role in commercial enterprises. This reform agenda aims to improve services for the public, and it includes ensuring that all SOEs are covered under the SOE governance framework, with plans to amend laws for nine remaining statutory SOEs to align them fully with the provisions of the SOE Act by June 2025.
The IMF further noted that the governing laws of four major statutory bodies have already been aligned with the SOE framework, with the alignment of nine additional statutory SOEs targeted by June 2025. Furthermore, in line with the directives from CCoSOEs, detailed restructuring, transformation, and merger plans for selected SOEs are actively under consideration and development.
The IMF highlighted the development of a centralized digital database for SOEs, which is being created by the CMU in collaboration with the National Information Technology Board. This digital database is designed to enhance monitoring, performance evaluation, and data-driven decision-making in the SOE sector.
Copyright Business Recorder, 2025
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