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Focus Shift from Primary Role to Government Debt Investments
Instead of adhering to their primary role of providing loans to the industry and promoting foreign investment, these financial institutions have been heavily investing in government debt, utilizing loans from the State Bank of Pakistan (SBP). Many of these boards are staffed with individuals who lack the necessary expertise, often ignoring violations of the Articles of Association.
Finance Minister Muhammad Aurangzeb has announced a plan to restructure these companies and their boards. He will begin receiving briefings on their operations, which were established in partnership with countries such as China, Saudi Arabia, Iran, Oman, Libya, Kuwait, and Brunei.
The management teams from the Saudi-Pak Industrial and Agricultural Investment Company and the Pak-Brunei Investment Company are scheduled to present their investment mandates today. They will provide explanations for their preference for investing in government debt rather than lending to industries.
Heavy Investments in Government Debt
Official statistics reveal that, as of December last year, these companies had invested Rs1.9 trillion in government debt, following nearly Rs2 trillion in borrowing from the central bank. In 2021, their investment in government debt was only Rs338 billion. However, in 2022, the SBP permitted these institutions to participate in Open Market Operations, undermining the International Monetary Fund’s (IMF) objective of halting direct lending to the federal government by the SBP.
Seven financial institutions were established with equity investments from regional countries, including the Pak-Kuwait Investment Company, Pak-China Investment Company, Pak-Brunei Investment Company, Pak-Oman Investment Company, Pak-Libya Investment Company, Pak-Iran Investment Company, and the Saudi-Pak Industrial Agricultural Investment Company.
These development financial institutions are designed to implement the government’s foreign development policies and promote industrial growth. However, according to the SBP, nearly all recent investments from these companies have been directed towards government securities, growing by 72.4% to Rs1.9 trillion last year. In contrast, loans to the private sector showed a stagnant growth rate of just 0.1% in 2023.
Concerns Over Governance and Nepotism
The SBP’s Financial Stability Review highlighted that the expansion in the asset base of these companies was primarily driven by investments, financed through borrowing. Their aggressive participation in Open Market Operations enabled these substantial investments.
A finance ministry official acknowledged that the government had largely ignored the financial affairs of these institutions, using their boards to accommodate favored politicians and bureaucrats.
These companies reportedly pay board members between $3,500 and $5,000 per meeting, equivalent to nearly Rs1 million to Rs1.4 million. Their websites indicate that retired bureaucrats continue to hold positions on these boards, enjoying the perks despite having left the finance ministry.
Federal Cabinet’s Efforts to Address the Issue
Additional secretaries at the finance ministry have divided the boards of these development financial institutions among themselves, regardless of their qualifications. To curb this trend, the federal cabinet decided in June that bureaucrats could not retain more than Rs1 million per annum in board fees. Any excess must be surrendered to the national treasury. However, this rule does not apply to retired bureaucrats, who continue to receive substantial board fees.
Several board positions remain vacant, and the Ministry of Finance has faced criticism for its poor track record in filling these roles. Additionally, the ministry has been slow to act against a senior executive of the Export-Import Bank, who allegedly tampered with records.
A senior official commented that the strong connections among bureaucrats have led to nepotism in the appointment of board members, allowing former bureaucrats to retain these positions even after retirement.
On Wednesday, the Senate Standing Committee on Finance directed the finance ministry to submit details of the vacant positions and the names of directors at these development financial institutions.
