Federal government seeks extension for loan repayments

ISLAMABAD: In a move to transfer responsibility of retiring Rs2.6 trillion debt obtained for budget financing on the shoulders of next political setup, the federal government is seeking to extend the statutory deadline by another four years, to 2023.

The move came in guise of giving more autonomy to State Bank of Pakistan under a condition imposed by International Monetary Fund as part of its $6.7 billion three-year bailout package.

SBP is supposed to get full autonomy by June 30, 2014, however, the government is likely to miss that deadline, sources in the ministry of finance said.

The bill that has been proposed to amend the SBP law is contrary to what the government has agreed with the IMF, they added. The federal government will have to seek a waiver from the IMF, as the bill introduced to amend the SBP Act of 1956 has not yet been cleared by any of the standing committees of National Assembly or the Senate.

It will be a second time that the government has asked for a waiver as it is likely to miss the June 30 deadline to appoint a financial advisor to privatise 26% shares of Pakistan International Airlines.

Both the sides are expected to hold a fourth review meeting of the $6.7 billion in early August where these issues will be taken up for discussion.

According to the proposed bill that the federal government introduced in the lower house of the Parliament on April 1, the debt of the federal government owed to the SBP till April 30, 2011, shall be retired not later than twelve years from that date.

Currently, the deadline is eight years, which ends in 2019 –the last year of the five-year constitutional term of the PML-N government.

Interestingly, it was the Finance Minister Ishaq Dar, who in his capacity as member Senate Standing Committee on Finance got an extension in the previous proposition of five years to eight years.

In its previous bailout programme, the IMF had sought autonomy for the SBP and also asked the then federal government to retire the SBP loans in five years, with effect from April 2011.

Foreseeing that his party coming into power, Dar had convinced the then Finance Minister Hafeez Shaikh to extend the deadline to eight years, which was eventually approved by the Parliament.

IMF has been pushing Pakistan to shift its financing to commercial banks, as the SBP borrowings are considered highly inflationary.

The interest the federal government pays on SBP borrowings comes back to it in shape of SBP profits, making the central bank borrowings virtually interest-free. As of June 2013, the outstanding debt stood at Rs2.24 trillion, according to the SBP.

Instead of reducing the amount as required under the SBP law, the federal government has added another Rs382 billion in the debt stock, taking the total liabilities to Rs2.623 trillion.

According to the sources, the proposed bill does not reflect what the IMF had asked the government to do.

The government will still have powers to amend the SBP decisions, despite the fact that political intervention in managing monetary and exchange rate affairs have in the past annoyed both the IMF and the SBP’s top management.

The federal government had assured the IMF that it will withdraw its nominee for federal finance secretary, from the Central Board of the SBP. However it has not yet informed the Parliament to withdraw its nominee, showed the bill.

The government has also given written assurance to amend the SBP Act to declare the pursuit of price stability as the primary objective of the central bank. The proposed bill is silent in this aspect.

The government has proposed to constitute monetary policy committee, however its independence is in question, as out of nine members four are already serving as Members of the SBP Board.

The monetary committee can only recommend the monetary and exchange rate policies but the final decision rests with the Board.

However, there are certain proposed amendments which will likely strengthen SBP governance and internal control framework.