Stalemate in PIA debt restructuring talks as banks demand 16.6pc interest

PIA currently owes Rs281 billion to commercial banks and faces an interest rate of around 23.5% on these loans

Commercial banks have proposed a fixed annual interest rate of 16.6% for deferring the recoveries of their Rs281 billion loans to Pakistan International Airlines (PIA) over five years.

However, this demand has been rejected by Finance Minister Dr. Shamshad Akhtar, who has countered with a proposal of approximately 10% interest based on the banks’ actual cost of borrowing.

The disagreement over these terms has led to a standstill in negotiations, impacting the privatisation process of PIA.

Sources from the Ministry of Privatisation indicated that the banks’ reluctance to issue no-objection certificates for transferring their debt to a new holding company is a major hindrance.

This new entity, necessary for PIA’s restructuring, cannot be formed without an agreement with all creditors.

The privatisation ministry is reportedly making a final push in the upcoming days to resolve these issues.

On a related note, Finance Minister Akhtar announced plans to transfer the entire PIA debt of Rs825 billion into a holding company. PIA currently owes Rs281 billion to commercial banks and faces an interest rate of around 23.5% on these loans.

The banks have requested a 16.6% fixed interest rate, calculated based on five-year Pakistan Investment Bond rates plus a 2.5% charge, in exchange for extending the loan repayments.

In response, the finance minister proposed an interest rate equal to the banks’ fund costs plus 2.5%, approximately 10.2%. The finance ministry also suggested a floating interest rate option linked to the remaining maturity days.

At the proposed 16.6% rate, banks would earn an estimated Rs233 billion in interest over five years, whereas the minister’s offer would result in about Rs143 billion less, saving nearly Rs90 billion.

The government anticipates a potential decrease in interest rates with an expected easing of inflation. However, securing another long-term IMF bailout package might limit this possibility.

The planned segregation of PIA into core and non-core entities faces delays due to a lack of statutory audited accounts and no-objection certificates from creditors.

The Privatisation Commission has approved a transaction structure to sell a minimum of 51% stake in PIA, intending to transfer a major portion of its debt to a new company for a cleaner balance sheet.

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