The federal government is set to provide preferential treatment to two domestic banks and is willing to take responsibility for their $88 million foreign currency lending to Pakistan International Airlines (PIA) without any restructuring.
The handling of the foreign currency loan contrasts with the restructuring of PIA’s Rs243 billion domestic debt, which is being extended for 10 years at reduced interest rates.
Government sources informed The Express Tribune that this decision will impose an additional burden on the exchequer in the shape of high interest rates in dollar terms and exchange rate risks over the next five years.
Unlike the commercial banks’ domestic lending of Rs243 billion being restructures, the finance ministry has declined advice to convert the $88 million or Rs25 billion foreign loan component into domestic currency, said sources. The government has decided to take over the responsibility of the Rs268 billion commercial banks’ debt to PIA, including the Rs25 billion or $88 million foreign currency loan. A consortium of the National Bank of Pakistan (NBP) and Habib Bank Limited (HBL) provided a $88 million loan to PIA at the Secured Overnight Financing Rate (SOFR) plus 5.4%, equivalent to around 11% in dollar terms.
Out of the $88 million, NBP lent $74 million, and HBL’s share was $14 million. The government is considering partially settling the $88 million, with the remaining $53 million to be managed by the government holding company. The Ministry of Finance will then handle the principal and interest payments on the foreign loan, assuming the risks of high interest rates and currency devaluation, said the sources. Despite proposals to reduce the interest rate to 6% in dollar terms and convert the foreign currency loan into domestic financing to save additional interest expenses and avoid exchange rate risks, the Ministry of Finance has not endorsed these suggestions.
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Sources mentioned that the Ministry of Finance is unwilling to reschedule the terms of this financing, unlike the treatment given to the Rs243 billion domestic lending by various banks.
The foreign loan facility will be settled in five years instead of 10, with the government paying an interest rate equal to SOFR plus 5.4%, close to 11% in dollar terms.
When contacted, Ministry of Finance Spokesperson, Qamar Abbasi stated, “The proposed transfer of the $88 million foreign currency loan is intended to be recorded on the books of Hold Co, similar to the rest of PIA’s commercial debt.” Abbasi mentioned that discussions regarding the terms of transfer are ongoing with the banks.
“Various proposals are being considered, including converting the loan from foreign currency to PKR, retaining it in its current form, or a combination of both,” Abbasi explained. He further added that the final decision will be made after considering the requirements of the domestic foreign exchange market and determining the appropriate level of foreign exchange risk to be assumed by Hold Co.
The government and commercial banks have already agreed on a Rs268 billion debt restructuring plan. Sources said that the new term sheet is expected to be signed by the government and banks within the week, paving the way for the issuance of No Objection Certificates by the banks to divide PIA into two and transfer its approximately Rs610 billion debt to a new holding company.
After obtaining the NOC, PIA will file a scheme of arrangement with the Securities and Exchange Commission of Pakistan (SECP) to establish the new holding company. This move will shift the burden of PIA’s inefficiency onto taxpayers but will remove an obstacle to its privatisation.
Under the new term sheet, the government will use proceeds from the PIA sale for principal payments, resorting to the budget if funds are insufficient. In return, banks will accept a 10-year debt rollover with a 12% annual interest rate, resulting in Rs32 billion in annual interest payments from 2024-25 onwards.
This arrangement means banks will receive over Rs300 billion in interest payments over a decade, exceeding their outstanding stocks of Rs268 billion. The total pay-out to banks at a 12% interest rate will be Rs573 billion over 10 years, said the sources.
Principal payments will be made from privatisation proceeds and the sale of other fixed assets. If, however, no proceeds are available, the finance ministry will settle the payments from the budget. The total outstanding debt of the airline is Rs825 billion, and the privatisation ministry and PIA will need no objection certificates from the CAA and FBR to file a scheme of arrangement with the SECP.
The Privatisation Commission board approved the transaction structure to sell a minimum of 51% stake after cleansing its balance sheet by transferring almost three-fourths of the Rs825 billion to a new company.
The government has informed the IMF of its plans to sell PIA by June this year.
Sources said that any decision to accept the $88 million loan in foreign currency will have significant budgetary implications, as the rupee-dollar parity is expected to fluctuate over the next five years.
Published in The Express Tribune, March 26th, 2024.
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