The government and commercial banks have agreed on a Rs268 billion debt restructuring plan for Pakistan International Airlines (PIA). This move, while shifting the burden of PIA’s inefficiency onto taxpayers, removes an irritant in its privatisation. The Ministry of Finance, abandoning its previous stance of not incorporating PIA debt into public debt, now commits to making principal and interest payments from the budget.

Under the agreement, the government will use PIA sale proceeds for principal payments, resorting to the budget if insufficient funds are available. Banks, in return, accept a 10-year debt rollover with a 12% annual interest rate, amounting to Rs32.2 billion in annual interest payments.

This arrangement means banks will receive Rs322 billion in interest payments over a decade, exceeding their outstanding stocks of Rs268 billion. The total payout to banks at a 12% interest rate will be Rs572 billion in 10 years, said the sources.

The Ministry of Finance will seek the endorsement of the International Monetary Fund due to implications of the arrangement on the budget, and the banks will go to their respective board of directors for approval, according to sources. A response from the Ministry of Finance spokesperson, on the circumstances that led to a change of heart at the ministry, was awaited until the filing of this story.

In March 2023, the finance ministry had stopped making interest payments on the PIA debt, compelling the government and the PIA management to look for the option for its privatisation. However, there are concerns that the commercial banks’ debt restructuring in isolation can delay its privatisation. The agreed restructuring and ownership of the PIA debt by the finance ministry ends the single biggest worry of the airline, which also takes away the single largest monthly charge from its balance sheet.

Privatisation Minister Fawad Hasan Fawad remained persistent in his demand to make PIA debt part of public debt, Finance Secretary, Imdad Ullah Bosal, and Finance Minister Dr Shamshad Akhtar finally agreed to the proposal with some caveats. Sources said that as per the understanding in the finance ministry, the privatisation ministry, and the representatives of nine commercial banks, the Rs268 billion debt, including Rs250 billion principal, is being restructured for 10 years.

The government will pay an interest rate equal to the one-year Karachi Interbank Rate (KIBOR) but capped at 12%. The interest payments will be made annually.

Read Plan for PIA sell-off submitted

The principal payments will be made out of the privatisation proceeds and the sale of other fixed assets. If, however, there are no proceeds available, the finance ministry will settle the payments from the budget. Sources said that the privatisation minister also informed the finance ministry that the plan to sell the Roosevelt Hotel and Scribe hotel has been shelved at this stage. Instead, the Roosevelt Hotel will be demolished, and a new structure will be built in the coming years.

Despite the agreement on the most contentious issue affecting its privatisation, PIA is nowhere close to privatisation. The total outstanding debt of the airline is Rs825 billion, and the privatisation ministry and PIA have to seek no objection certificates from the Civil Aviation Authority and Federal Board of Revenue to file a scheme of arrangement with the Securities and Exchange Commission of Pakistan (SECP). A Scheme of Arrangement, segregating PIA into core and non-core entities, could not be filed with the SECP due to the absence of statutory audited accounts of PIA until September 2023 and no-objection certificates from creditors.

The finance minister said two weeks ago that PIA’s Rs825 billion debt would be transferred into a holding company. “I do not know what to do with this debt,” remarked the finance minister while speaking at a seminar on the economic issues of the country.

The banks have agreed to give an NOC to SECP to transfer their debt worth Rs268 billion into the holding company and vacating their claim on PIA’s assets. The Privatisation Commission board had 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 board also approved setting up a new holding company in which to park the debt.

The privatisation minister was hopeful that he would be able to sell PIA before the end of the caretaker government tenure, which looks like it will not happen.

The federal government has rejected some other demands put forth by the banks. The banks had requested that the PIA debt be considered eligible for the Capital Requirement Regulations (CRR), but the finance ministry declined this proposal. Similarly, the banks’ request for deferring tax payments on the profits they would earn was also turned down. Sources said that the banks have also asked for firm commitment that the PIA privatisation will not be halted after the clearing of its balance sheet.

Published in The Express Tribune, February 2nd, 2024.

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