Rising contingent liabilities in sync with growing quasi-fiscal deficit

The growing 'contingent liabilities' of the government is an unpropitious development. This is because it entails some undeniable risks and challenges to maintenance of budgetary discipline and macro-economic stability. It will thus be foolhardy to overlook the possible adverse impact of such liabilities that have been on the rise, quite markedly, in recent years. These may involve payments of funds by the government, in the event of failures on the part of those in whose favour guarantees -- the guarantees that create such liabilities -- are given, to meet the obligations under any business deal or contract, or of other financial operations. Here, the risks relating to contingent liabilities lurk in the shadows for the government. These liabilities can devolve on it, depending on the outcome of an uncertain future event. Hence, the nature and extent of government's contingent liabilities are critically important for assessing realistically the likelihood of future risks.
Against this backdrop, it is understandable why there is a growing concern among the country's economists about the increasing volume of government's contingent liabilities that are largely arising out of guarantees that are given against loans negotiated or obtained by different state-owned enterprises (SoEs) or parastatals. The stock of government guarantees that are valid beyond June 30, 2014, is valued, according to a recent FE report, at about Tk 669 million -- an amount that is equivalent to the current size of the country's Annual Development Programme (ADP). Economists at a recent seminar in the capital, according to the FE report, cited many instances of failures on the part of a number of SoEs and parastatals to repay their loan instalments in time. Under such circumstances, the government has been making repayments to lenders every year for their failures. Lack of transparency about matters or issues relating to such contingent liabilities, has also been reported. The concerned economists have thus alerted the policy-makers about the possible adverse impact of rising 'contingent liabilities' -- the liabilities that are in the nature of quasi-fiscal deficit -- on government's overall budget deficit.
The whole gamut of issues about quasi-fiscal deficit of the government merits a dispassionate review. This is particularly so, because such deficit is now interwined with a complex web of problems. The latter encompass a wide array of areas covering provision of services at prices below cost-recovery levels by some public sector bodies, purchases of more physical resources than what are actually needed or at prices above the market-driven ones by some public sector entities, rising volume of default or bad loans of the state-owned banks largely due to their flawed governance, mounting losses of SoEs, grants for subsidies and cross-subsidies, mutual arrears of public sector organisations etc. As such, all such issues have significant macro-economic implications. If these are not addressed properly and in a transparent manner without further delay, they are most likely to distort the picture about the government's true fiscal position as well as the size of its real deficit. Left unattended for long, they can create a self-perpetuating cycle of ever-rising contingent liabilities, amid risks of disproportionate monetary expansion, high inflation and undesirable crowding-out effects.