SBP Refuses to Protect Banks From Losses in PIA Privatization

The State Bank of Pakistan (SBP) has refused to give a waiver for Rs. 268 billion in commercial bank loans and dollar-denominated guarantees for expediting the privatization of Pakistan International Airlines (PIA). The Ministry of Finance and commercial banks had agreed to treat this loan as a new loan from January 1, 2024, contingent upon SBP’s waiver. However, the central bank has shown reluctance to grant this exemption, reported a national daily. Commercial banks entered into this arrangement with the understanding that regulatory coverages, including waivers, would be in place to protect them from losses. This agreement was documented in a term sheet dated March 28, 2024, between PIA Holding Company Limited and syndicate financiers. The SBP’s conditions require banks to recognize modification losses and Expected Credit Loss (ECL) against government-guaranteed USD loans under IFRS-9. The SBP mandates that financing to PIAHCL be treated as a fresh loan effective January 1, 2024, meaning that modification losses should not apply. However, the fair value impact under IFRS-9 remains applicable which could incur big losses for the banking sector. The banks have requested SBP to reconsider and grant a complete waiver for IFRS-9 provisions for both PKR and sovereign-guaranteed FCY (USD) loans. They argued that the PIA sale cannot proceed under the current commercial terms.