Pakistan is planning to join the growing list of emerging markets developing new strategic sovereign wealth funds with at least seven state assets worth at least PKR23 trillion (US$80 billion) set to be transferred to the new organization.
The Express Tribune reports that senior finance officials of the outgoing government are in the final stages of preparing legislation, which could be tabled as early as next week. According to the sources, the Abu Dhabi Investment Authority (ADIA) has provided technical assistance in drafting the bill, which will create a fund that will be exempted from privatization laws to raise capital or debt.
The Pakistan Sovereign Wealth Fund (PSWF) will be seeded with the Oil and Gas Development Company, Pakistan Petroleum, National Bank of Pakistan, Pakistan Development Fund, Government Holdings Private Ltd, Mari Petroleum Company, and Neelum Jhelum Hydro Power Company.
The government believes that consolidating the assets into a single fund will enable it to generate liquidity and attract inward investment. The fund’s purpose will be to improve management of the assets, including investing in joint ventures with foreign investors, such as other sovereign wealth funds. Cash raised from divestment of its core assets could be used to fund investments in agriculture, mining, and information technology sectors, according to the officials.
A Supervisory Council will be formed chaired by the prime minister and including the ministers of finance and planning, the finance secretary, the governor of the central bank and the PSWF’s CEO. In addition, the government will appoint a seven-member advisory committee, which will recommend appointments to a seven-member board that will run day-to-day affairs and policies.
The decision to launch the fund comes amid pressures on foreign exchange reserves and a potential default, which would require the liquidation of assets. Pakistan faces US$23 billion in external debt payments in FY2023/24 (July-June), which is more than six times the forex reserves held by the State Bank of Pakistan. Concerns about national debt are having a downward pressure on the value of the Pakistani rupee.
An IMF Article IV staff report issued last year advocated “restructuring SOEs to improve efficiency,” noting that “Pakistan’s SOE sector is saddled by poor performance and weak corporate governance, posing significant fiscal risks”. It added that “despite their important role in the economy, the financial performance of many SOEs is weak, with one-third consistently generating losses.”
By establishing the PSWF, the government hopes to limit some of the financial losses that are a drag on the treasury as well as raising funds for strategic investment. Advocates of the PSWF are hopeful that foreign capital will be accompanied by improved managerial competence. Also, by bypassing the usual red-tape that encumbers privatization, transactions are likely to be sped up and entice foreign investment. Yet, if the process of divestment is not transparent, price discovery will be questioned, and sales could raise doubts – and therefore political disputes – over valuations.
Whether the PSWF has longevity, however, is another matter. A national election is due in late 2023, which increases the prospect of domestic political instability – particularly given the backdrop of a deteriorating security situation. If the vote is disputed or the result is unclear, there is a heightened chance of military intervention. Instability could deepen the country’s debt woes. With its Supervisory Committee dominated by political figures, the new PSWF is prey to political ructions and turbulence that characterize Pakistani politics.
