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Business Recorder
05-08-2025
- Business
- Business Recorder
Circular debt: banks to the rescue
Another year, another circular debt headline. But this time, something different has happened. For the first time in years, Pakistan's power sector has seen a significant resolution of circular debt stock, even if the flow remains a looming threat. Recent Power Division data shows circular debt at Rs 2.396 trillion as of March 2025, a marginal increase since July last year, and Rs 398 billion lower than March 2024. This is no small feat for a system accustomed to perpetual bleeding. Credit where it is due: the government has taken tough steps to control leakages, enforce cash flow discipline, and ring-fence funds to repay sector debt. The Finance Ministry's decision to redirect the Rs 3.23/kWh Debt Service Surcharge (DSS) solely towards debt reduction, rather than letting it disappear into the general pool, reflects fiscal prudence. Zafar Masud, Chairman of the Pakistan Banks Association (PBA), recently highlighted that this time, reforms go beyond temporary bailouts. There is an emerging focus on plugging systemic leakages, enforcing timely payments across the supply chain, and rethinking subsidy structures to reach the vulnerable without distorting the entire revenue cycle. Enhanced governance in DISCOs and technology-led oversight using digital monitoring tools are being rolled out to reduce theft and line losses, chronic ailments that have plagued the sector for decades. However, let's be clear: this is not the end, only a breather. NEPRA warns that average utilization of our 45,888 MW installed capacity remains just 34 percent, and even peak utilization is a mere 56 percent. Consumers continue to pay for idle capacity while distribution companies remain plagued by infrastructure decay, theft, inflated billing, and dismal recoveries. Without addressing these legacy issues, including both infrastructure upgrades and efficient collections, we will soon find ourselves back at square one. What makes this circular debt resolution truly historic is its scale and execution. It involved Rs 683 billion as the largest-ever restructuring of government debt sitting on bank balance sheets, combined with Rs 612 billion as the largest fresh syndicated financing ever raised independently. Collectively, this has become the largest banking transaction in Pakistan's history, by leaps and bounds, nearly 4.5 times bigger than the previous largest transaction. This was not only the largest, but perhaps the quickest execution ever of such a complex, multi-stakeholder financial transaction. The banking industry stepped up, taking a larger view of economic revival, knowing that healthier power sector cash flows will reduce financial risks and unlock growth opportunities for banks themselves. Banks agreed to a 150-basis-point reduction in their rate, bringing the new facility to KIBOR minus 90 bps. If rates fall, repayments will accelerate, potentially clearing this debt within four to six years. This frees up bank balance sheets, releases sovereign guarantee headroom for priority sector financing, and revives liquidity within the power sector itself. Power companies now have the room to invest in upgrades, efficiency, and financial discipline, while banks can redeploy freed capital into productive lending for SMEs, agriculture, green energy, and industrial revival. This is the kind of systemic fix that supports economic growth directly and indirectly. To bring all partners together, the PBA played a central and strategic role, building consensus, aligning stakeholder interests, and ensuring this was not just a transaction but a transformative milestone. The government's role has also been critical in enforcing discipline, but it is the collaborative spirit between the government, banks, and regulators that has created this breather. For the first time in years, there is visible alignment to move from crisis management to long-term planning. But let us be clear-eyed: the real battle is far from over. While the stock has been resolved at this point in time, the flow must stop and remain stopped going into the future. If we lose momentum, if governance reforms stall, if privatization of DISCOs remains shelved, if distribution efficiency improvements and collections falter, we will end up back where we started. Circular debt is not a disease in itself; it is a symptom of a broken system. Today, we have bought time. This is a positive step in a journey that must continue with unrelenting focus. The power sector crisis was not created overnight, nor will it be resolved overnight. But for the first time in a long while, there is a sense of shared responsibility, decisive action, and cautious hope. Let us not lose the momentum. The real work has just commenced. (The writer is advisor — Pakistan Banks Association) Copyright Business Recorder, 2025
Express Tribune
30-06-2025
- Business
- Express Tribune
PBA refutes claims subsidies serve no purpose
The Pakistan Banks Association (PBA) has strongly rejected "misleading assertions" in recent press coverage, suggesting that government subsidies to banks under remittance incentive schemes serve no economic purpose. "Such narratives dangerously undermine public confidence at a time when Pakistan's financial stability depends on robust formal remittance flows," the association said in a statement. It recalled that when the Pakistan Remittance Initiative (PRI) was conceptualised in 2008, formal remittances stood at only $6.5 billion, while an estimated $20 billion flowed through undocumented Hawala/Hundi channels, exacerbating balance of payments pressures. The PRI, launched in 2009, was a homegrown solution to shift flows to formal banking channels, offering an initial incentive of SAR 20 per transaction, approximately 2.25% of the average $500 transaction, which was far more viable than foreign borrowings carrying interest rates above 3.5% plus long-term repayment obligations and exchange rate risks. In contrast, PRI incentives are one-time PKR payments with no repayment liability, making them a strategic win-win for Pakistan's economy, the PBA said. According to the association, banks do not profit from these incentives. In reality, they bear enormous costs to remain competitive, offering higher rebates and forex premiums to money transfer operators and remitters abroad. "These costs are only partially offset by government incentives, with the remainder absorbed by banks to maintain essential liquidity for import payments and economic stability." Allegations that banks manipulate remittance data, launder undeclared funds, or facilitate tax evasion are baseless, it stressed, adding that banks operate under strict SBP regulations, AML/CFT frameworks, and independent audits. "The classification of freelancer and IT exporter earnings as remittances is a policy classification issue needing regulatory clarity, not bank misconduct."
Business Recorder
30-06-2025
- Business
- Business Recorder
PBA refutes reports on remittance subsidies to banks
The Pakistan Banks Association (PBA) rejected on Monday what it called 'misleading assertions' in recent press coverage suggesting that government subsidies to banks under remittance incentive schemes serve no economic purpose. 'Such narratives dangerously undermine public confidence at a time when Pakistan's financial stability depends on robust formal remittance flows,' PBA statement read. It further said when the Pakistan Remittance Initiative (PRI) was conceptualised in 2008, formal remittances stood at only $6.5 billion, while an estimated $20 billion flowed through undocumented hawala/hundi channels, exacerbating balance of payments pressures. 'The PRI, launched in 2009, was a homegrown solution to shift flows to formal banking channels, offering an initial incentive of SAR 20 per transaction, approximately 2.25% of the average $500 transaction, which was far more viable than foreign borrowings carrying interest rates above 3.5% plus long-term repayment obligations and exchange rate risks. In contrast, PRI incentives are one-time PKR payments with no repayment liability, making them a strategic win-win for Pakistan's economy.' The PBA was of the view that banks do not profit from the incentives. 'In reality, they bear enormous costs to remain competitive, offering higher rebates and FX premiums to Money Transfer Operators (MTOs) and remitters abroad. These costs are only partially offset by government incentives, with the remainder absorbed by banks to maintain essential liquidity for import payments and economic stability.' For example, it added, banks often pay Rs3-5 per USD premium over interbank rates to attract flows that would otherwise revert to hawala, incurring direct losses in the national interest. 'Contrary to claims, banks invest heavily in compliance systems, international correspondent banking relationships, technology platforms, and customer outreach to process remittances securely and efficiently,' the PBA said. Approximately 90% of rebates before FY25 and over 100% under FY25 schemes were passed directly to international partners, leaving no direct profit for banks, according to the association. 'Furthermore, banks pay their partners upfront while government reimbursements are delayed by months, imposing significant working capital costs. 'Banks submit monthly data of PRI remittances to SBP, duly reviewed and certified by Internal Audits of the Banks. SBP also conducts review of this certified data before making payment of incentive under the scheme.' Allegations that banks manipulate remittance data, launder undeclared funds, or facilitate tax evasion 'are baseless', the PBA said. It further said banks operate under strict SBP regulations, AML/CFT frameworks, and independent audits. The classification of freelancer and IT exporter earnings as remittances is a policy classification issue needing regulatory clarity, not bank misconduct, the press release stated. 'It is telling that such narratives are often promoted by vested interests seeking to dismantle the formal banking remittance ecosystem to divert flows back into their networks. These banking-led initiatives have been instrumental in ensuring Pakistan's compliance with global AML/CFT standards, preventing potential blacklisting that would cripple the economy. 'Pakistan's banks continue to offer competitive FX rates despite incurring losses, solely to preserve formal flows. Without these incentives, remittances would revert to undocumented channels, undermining fiscal sustainability and increasing dependence on costly foreign borrowing.' According to the PBA, the suggestion that banks are subsidised 'ignores the economic reality that these incentives ensure secure, documented, and traceable remittance flows critical for Pakistan's economy'. 'Banks remain among the country's largest taxpayers and employers, paying over Rs850 billion in taxes annually, while financing every facet of national economic activity. 'Mischaracterising their role only weakens public trust at a time when economic unity and realism are paramount.' The PBA said while modalities could be improved over time, PRI remained a strategic success story. 'The PBA remains committed to working with policymakers to strengthen Pakistan's economy, maintain global compliance, and safeguard financial stability, but rejects in the strongest terms any narrative driven by vested interests that undermines the banking sector's contributions and national economic security. 'PRI is an essential driver striving for Pakistan's financial independence and diversion from reliance on international debt and forex assistance,' the press release read.
Express Tribune
30-06-2025
- Business
- Express Tribune
PBA refutes misleading claims on remittance subsidies
Listen to article The Pakistan Banks Association (PBA) rejected on Monday misleading assertions in recent press coverage suggesting that government subsidies to banks under remittance incentive schemes serve no economic purpose. In a detailed statement, the PBA cautioned that such narratives risk undermining public confidence in formal remittance channels at a time when financial stability relies on documented foreign inflows. "When the Pakistan Remittance Initiative (PRI) was conceptualised in 2008, formal remittances stood at only $6.5 billion, while an estimated $20b flowed through undocumented hawala/hundi channels, exacerbating balance of payments pressures," read the statement. The PRI, launched in 2009, was a homegrown solution to shift flows to formal banking channels, offering an initial incentive of SAR 20 per transaction, approximately 2.25% of the average $500 transaction, which was far more viable than foreign borrowings carrying interest rates above 3.5% plus long-term repayment obligations and exchange rate risks, it added. "In contrast, PRI incentives are one-time PKR payments with no repayment liability, making them a strategic win-win for Pakistan's economy. Banks do not profit from these incentives." In reality, they bear enormous costs to remain competitive, offering higher rebates and FX premiums to Money Transfer Operators (MTOs) and remitters abroad, according to the statement. These costs are only partially offset by government incentives, with the remainder absorbed by banks to maintain essential liquidity for import payments and economic stability. "For example, banks often pay Rs3-5 per USD premium over interbank rates to attract flows that would otherwise revert to hawala, incurring direct losses in the national interest," explained PBA. "Contrary to claims, banks invest heavily in compliance systems, international correspondent banking relationships, technology platforms, and customer outreach to process remittances securely and efficiently," it added. Approximately 90% of rebates before FY25 and over 100% under FY25 schemes are passed directly to international partners, leaving no direct profit for banks, according to PBA. Furthermore, banks pay their partners upfront while government reimbursements are delayed by months, imposing significant working capital costs. Banks submit monthly data of PRI remittances to SBP, duly reviewed and certified by Internal Audits of the Banks. SBP also conducts review of this certified data before making payment of incentive under the scheme. Allegations that banks manipulate remittance data, launder undeclared funds, or facilitate tax evasion are baseless, read the statement. Banks operate under strict SBP regulations, AML/CFT frameworks, and independent audits. The classification of freelancer and IT exporter earnings as remittances is a policy classification issue needing regulatory clarity, not bank misconduct. It is telling that such narratives are often promoted by vested interests seeking to dismantle the formal banking remittance ecosystem to divert flows back into their networks, maintained PBA. "These banking-led initiatives have been instrumental in ensuring Pakistan's compliance with global AML/CFT standards, preventing potential blacklisting that would cripple the economy. Pakistan's banks continue to offer competitive FX rates despite incurring losses, solely to preserve formal flows. Without these incentives, remittances would revert to undocumented channels, undermining fiscal sustainability and increasing dependence on costly foreign borrowing. The suggestion that banks are subsidised ignores the economic reality that these incentives ensure secure, documented, and traceable remittance flows critical for Pakistan's economy." Banks remain among the country's largest taxpayers and employers, paying over Rs 850b in taxes annually, while financing every facet of national economic activity. Mischaracterising their role only weakens public trust at a time when economic unity and realism are paramount, according to PBA. While modalities can be improved over time, PRI remains a strategic success story. "The PBA remains committed to working with policymakers to strengthen Pakistan's economy, maintain global compliance, and safeguard financial stability, but rejects in the strongest terms any narrative driven by vested interests that undermines the banking sector's contributions and national economic security," read the statement. PRI is an essential driver striving for Pakistan's financial independence and diversion from reliance on international debt and forex assistance.
Business Recorder
30-05-2025
- Business
- Business Recorder
A ‘bold' budget for next FY
EDITORIAL: Finance Minister Muhammad Aurangzeb while addressing an event organised by Karandaz Pakistan and Pakistan Banks Association claimed that macroeconomic stability has been achieved. However, this stability, as per the October 2024 documents relating to the approval of the ongoing Extended Fund Facility programme are, is disturbing as the country's vulnerabilities continue to persist. The Fund document notes, 'A large part of the economy is uncompetitive, propped up by the extensive use of protection, subsidies, and tax concessions, which have undermined the tax base. Protectionism, including from new entrants in domestic markets has undermined competition, leading to inefficiency and low productivity. A difficult business environment and weak governance have hindered investments, which remain significantly lower than peer countries, further undermining competitiveness. Economic volatility has only increased over time, with a tight correlation between Pakistan's boom-bust economic outcomes and its macroeconomic policies. The repeated attempts to boost economic activity through fiscal and monetary stimulus have not translated into durable growth, as domestic demand increased beyond Pakistan's sustainable capacity, resulting in inflation and depletion of reserves, given a strong political preference for stable exchange rates. Each subsequent bust has further harmed Pakistan's policy making credibility and investment sentiment.' Aurangzeb further stated that the government is preparing to introduce 'bold measures' in the budget with a focus on strategic direction. One must welcome this orientation that was lacking in previous budgets as the focus was on balancing the books through raising the target revenue to an unrealistic level that was rarely if ever met by the end of the year, and adjusting the shortfall through slashing the Public Sector Development Programme (PSDP). In addition, domestic and external borrowing was increasingly relied on to meet our external financing needs (read repayment of interest and principal as and when due on foreign debt) as well as the budget deficit targets agreed with the IMF; and in this context it is relevant to note that in the current fiscal year the budgeted external borrowing has not yet materialised, partly due to global factors but partly due to Pakistan's high-risk rating that continues in spite of claims of having achieved economic stability. Next year's foreign borrowing requirements are projected at 19.3 billion dollars, which no doubt would limit the government's capacity to introduce some 'bold measures' unless of course the government is able to slash current expenditure at best or keep it at 2024-25 levels at worst. The minister proceeded to aver that rather than making the math work the government intends to make the budget more strategic. This too must be appreciated though the recent statement by the Finance Ministry delivered during the meeting of the sub-committee of the National Assembly on Commerce should be a source of concern; notably, the acknowledgement that there was a disagreement with the Fund over some key budgetary figures including subsidy allocation. There is overwhelming evidence that Pakistan has almost no leverage with the Fund at present that would allow the authorities an element of phasing out the harsh up-front conditions without proactively exercising leverage through either pension reforms (with the start of employee contributions) and resisting a pay raise for the 7 percent of the workforce which receives a salary at the taxpayers' expense, a policy that no previous administration has been able to implement, and to strictly adhere to the math behind the budget document by adhering to the expenditure and revenue sources identified in the budget. The minister also claimed that Pakistan has achieved macroeconomic stability and emphasised the need for avoiding past mistakes that accounted for the boom-bust syndrome. There is no doubt that in the past the 'sugar high' he referred to was a factor that led the country to repeat the same mistakes over and over again: pumping liquidity into the market (through mainly government expenditure on industrial incentives and subsidies), which led to sustaining an industrial base (that envisages exporting the surplus rather than producing for export) that requires massive imports which, in turn, led to periodic balance of payment issues requiring IMF programme loans. The challenges facing the country's economy are immense and one can only hope that the finance minister stays the course, with full support from all stakeholders, otherwise the country would be pushed deeper into the mire with the prospect of success even more difficult. Copyright Business Recorder, 2025
