Mohsin Siddiqui (Chief Reporter)
The long-anticipated privatization of Pakistan International Airlines (PIA) faces a critical obstacle following the State Bank of Pakistan’s (SBP) recent decision to deny a waiver on loans and guarantees totaling Rs268 billion. This decision has raised concerns about a potential financial fallout, which could significantly impact the banking sector and delay the privatization process further.
The refusal by the SBP to grant a waiver or exemption on these substantial loans and associated guarantees could result in severe financial implications for the banking sector. It is estimated that, without the agreed waiver, the sector might suffer a loss of approximately Rs40 billion. This scenario is compounded by the fact that the Ministry of Finance and commercial banks had previously agreed to treat the Rs268 billion loan amount as a fresh loan, effective from January 1, 2024.
However, the SBP’s reluctance to provide this concession has cast a shadow over the entire privatization process. The waiver was expected to protect commercial banks from incurring significant provisioning or loss, as outlined in the term sheet agreed upon on March 28, 2024. This agreement was made between the PIA Holding Company Limited (PIAHCL) and a syndicate of financiers.
According to the SBP’s letter, the commercial banks are required to recognize modification losses and expected credit losses (ECL) under International Financial Reporting Standard (IFRS) 9 for the government-guaranteed USD loans. Specifically, clause “g” of the letter mandates the recognition of modification loss, while clause “f” necessitates ECL provisioning against USD loans guaranteed by the government.
The SBP’s directives imply that the financing to PIAHCL should be treated as a fresh and regular loan from January 1, 2024, as stated in clauses “a,” “b,” “c,” and “d” of the letter. Despite this, the concept of modification loss is deemed inapplicable in this context. However, the fair value impact under IFRS 9 will still apply, potentially resulting in a considerable upfront loss for the banking industry.
In light of these challenges, financiers have formally requested the SBP to reconsider their position and grant a complete waiver or exemption of IFRS 9 requirements for both PKR and sovereign-guaranteed foreign currency (USD) loans. The financiers argue that without such an exemption, proceeding with the transaction under the current commercial terms would lead to significant losses for the industry.
This request underscores the urgency and importance of resolving the waiver issue to facilitate the successful privatization of PIA. The inability to secure this waiver could derail the transaction and exacerbate financial strains on the banking sector.
The privatization of PIA, already delayed for several months, remains a high-priority agenda for the government. Efforts are ongoing to complete the privatization process within the current calendar year of 2024. However, the recent waiver denial by the SBP adds another layer of complexity to the already challenging privatization process.
The government’s commitment to privatizing PIA is crucial for addressing the airline’s financial woes and improving its operational efficiency. The delay in this process could have broader implications for the airline industry and the national economy.
