PIA’s privatisation hits snag as SBP refuses waiver on loans

ISLAMABAD: An obstacle to the long-delayed privatisation of Pakistan International Airlines (PIA) has emerged as the State Bank of Pakistan (SBP) has refused to grant a waiver/exemption on the loans of commercial banks of Rs268 billion as well as guarantees in dollars.

It has been estimated that if the agreed waiver is not granted, the banking sector might face a whopping loss of around Rs40 billion. The Ministry of Finance and commercial banks have agreed upon treating this loan amount of Rs268 billion against PIA as a fresh loan with effect from January 1, 2024. It requires a waiver from the SBP but now the regulator is reluctant to grant this concession.

The News sent a query to the SBP, but it has not responded till the filing of this report.

Top official sources confirmed to The News on Wednesday that the commercial banks entered into the transaction based on the understanding with the Ministry of Finance that all regulatory coverages including waivers would be available, which would protect the bankers from incurring any provisioning/loss and this was agreed in the term sheet dated March 28, 2024, entered by and between PIA Holding Company Limited and the syndicate financiers. However, as per clause “g” of the SBP letter, the commercial banks are required to recognise modification loss and as per clause “f” of the letter Expected Credit Loss (ECL) provisioning against GoP guaranteed USD loans under IFRS-9 in their P&L.

As per clauses a, b, c and d of the SBP letter, the subject financing to PIAHCL shall be treated as a fresh and regular loan with effect from January 1, 2024. Therefore, it is our understanding that the concept of modification loss does not arise in this particular facility. However, it is a fact that the fair value impact under IFRS-9 shall be applicable, which would result in a significant upfront loss to the entire banking industry.

“We request SBP to reconsider financiers’ request for complete waiver/exemption of IFRS 9 for both PKR and the sovereign guaranteed FCY (USD) loans and its resultant modification/fair valuation loss as applicable under this facility. Without this exemption/waiver, the financiers will be unable to proceed with the aforementioned transaction on the existing commercial terms agreed in the Term Sheet as it would result in significant losses to the industry.

The government has already delayed the privatization of PIA for couple of months and efforts are underway to accomplish the task within the ongoing calendar year 2024.