ISLAMABAD:

Pakistan has given a commitment to the International Monetary Fund (IMF) to strip the Sovereign Wealth Fund (SWF) of its legal powers to directly sell assets of state?owned enterprises (SOEs) to foreign nations and to retain revenues or take loans.

According to these assurances, Pakistan will not make the SWF operational until parliament approves new amendments to its law that withdraw all those powers and lower the fund’s status to that of a holding company. However, the finance ministry again missed the extended deadline to submit these amendments to parliament by the end of March. To prevent any backpedalling by the government, the IMF has imposed a condition that the wealth fund cannot be made operational until its law is drastically revised to the global lender’s satisfaction.

The Pakistan Democratic Movement (PDM) government had enacted the Pakistan Sovereign Wealth Fund Act in 2023 to transfer shares of seven profitable entities in the first phase and then sell them overseas to raise money. The fund remains non?operational because of objections raised by the IMF. Those entities are Oil and Gas Development Company, Pakistan Petroleum Limited, Mari Petroleum, National Bank of Pakistan, Pakistan Development Fund, Government Holdings (Private) Limited, and Neelum?Jhelum Hydropower Company. The IMF objected to the governance structure and the legal mandate that allowed the sovereign fund to directly sell state assets to foreign nations without a competitive process.

As part of the understanding under the third programme review, Finance Minister Muhammad Aurangzeb has now assured the IMF that the agreed amendments will be implemented. The IMF is set to approve two loan tranches worth $1.2 billion this Friday.

“The execution of the SWF Act and any other action aimed at preparing the SWF for its operation will only be carried out after these amendments become law,” according to the written commitments.

Sources said a major amendment would change the fund’s legal status, reducing it to a holding company. Under the deal, the wealth fund’s role would also be narrowed to holding and managing SOEs on behalf of the state and creating value through their operational and financial improvement. The wealth fund would attract foreign direct investment by facilitating and mobilising co?investment in strategic commercial ventures that generate financial returns in line with the SWF’s investment mandate.

In a major change, the wealth fund cannot directly sell assets to local or foreign players. Instead, the privatisation or sale of assets of the seven SOEs that the fund currently holds must follow international standards and best practices, ensuring “open, competitive, transparent and non?discriminatory procedures, requiring minimum disclosure requirements for each stage of the process, including on beneficial ownership”.

Likewise, the finance ministry would ensure that appropriate fiscal safeguards are in place, including requiring that all revenues from wealth fund and its sub?funds’ operations be provided directly to the government. Unlike the original law, the wealth fund cannot retain any money needed for investments; any such requirement would be met by allocating funds in the budget and under the Public Financial Management Act, sources added.

There would be a complete ban on the wealth fund incurring debt or borrowing in any way. The fund cannot provide guarantees or collateral, including over the SOE shares or assets it holds. It cannot lend to public or private entities, or to any persons, foreign or domestic. It cannot participate in public?private partnerships, cannot acquire financial assets or instruments of any kind, and cannot receive any contributions from the central bank, SOEs or any other public body, sources said.

The government would also ensure that appointments to the SWF’s board and advisory committee are made through transparent, merit?based and participatory processes to safeguard professionalism and independence from undue public and private influence, including by introducing effective cooling?off periods for stronger independence. The accountability mechanism defined under the SOEs Act would also apply to the wealth fund and its managed companies. The exemptions granted under current section 50 of the SWF Act will be withdrawn.

The government has also given fresh commitments to the IMF on the privatisation front – an area where it lags behind all its commitments. The only success so far is the privatisation of Pakistan International Airlines. The government told the IMF that it has delayed private sector participation in some power distribution companies while further steps are taken to address market concerns.