ISLAMABAD: The federal cabinet has regularised nearly $2 billion foreign commercial loans that the government had obtained during second half of the last fiscal year without prior approval of the cabinet and also waived 10% tax on interest payments to foreign lenders.
It was the second time during the last nine months that the federal cabinet gave ex-post facto approvals of foreign commercial borrowings.
In February 2017, the federal cabinet had also regularised the $2.7 billion foreign commercial loans.
The Ministry of Finance had signed eight agreements between December 2016 and June 2017 with foreign banks to obtain $1.965 billion short-term loans to support the dwindling foreign currency reserves.
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All the eight loan agreements had been signed without obtaining prior approval of the federal cabinet, which is necessary under the Rules of Business of 1973.
Rule 16(1)(d) of the Rules of Business states that ministries would bring “proposals for levy, abolition, remission, alteration or regulation of any tax and floatation of loans” for the approval of the federal cabinet.
However, the federal cabinet gave its ex-post facto approval of those loans on Tuesday, regularising the borrowings.
The ex-post facto approvals are in violation of the spirit of the Supreme Court judgment of August 2016. The apex court’s ruling binds the government to initiate all fiscal matters with the consent of the federal cabinet.
The finance ministry obtained the loans from foreign commercial banks, bypassing the competitive process which had also raised transparency concerns.
The cabinet gave the approvals amid growing criticism against the finance ministry’s strategy to remain afloat by taking ‘sky high’ debt.
During the four-year tenure of the PML-N government, the country’s external debt swelled from $61 billion to a record $83 billion. There was a net addition of $22 billion in the external loans in just four years.
The $1.965 billion borrowings were part of a record-breaking $4.4 billion short-term foreign commercial loan that the PML-N government had obtained during FY2016-17 that ended on June 30. Out of this, $2.3 billion came from Chinese financial institutions alone.
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The finance ministry got $275 million from Citibank on June 30 – the last day of the fiscal year. It also signed a common term agreement with Standard Chartered Bank on June 20 for $700 million loan – just 10 days before the close of the fiscal year.
The finance ministry signed two agreements for $650 million loan with Credit Suisse on June 7 and May 18.
Two agreements for $245 million loan were signed with the Dubai-based Noor Bank PJSC on May 15 and March 30.
Pakistan also got $40 million loan from the ECO Trade and Development Bank on February 17 this year, and $55 million from the Dubai Islamic Bank on December 8, 2016
The federal cabinet also waived 10% tax on interest payments to the financial institutions without involving the National Assembly.
The Ministry of Finance informed the federal cabinet that “foreign commercial loans are offered with the condition that taxes applicable in Pakistan would not be borne by the lenders”, showed the official documents.
“The Federal Board of Revenue supported the proposal to waive the taxes. It is a standard practice to waive taxes on foreign commercial loans to cut the cost of borrowings,” said Dr Mohammad Iqbal, spokesman for the FBR.
The government took the loans after it failed to attract sufficient non-debt creating inflows, like enhancing exports and foreign direct investment to meet its external financing requirements.
The country’s exports have been constantly declining since the PML-N government came into power. During the last fiscal year, the exports stood at only $20.44 billion, which were just 6.7% of the total size of the economy.
Pakistan’s official foreign currency reserves – largely built by borrowings – have again started depleting after the end of the International Monetary Fund facility. As of end September, the foreign currency reserves held by the central bank stood at $13.78 billion.
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