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Pakistan: Loans to Politicians Waived

(Apr. 2, 2008) On January 21, 2008, the Supreme Court of Pakistan issued a suo moto notice to the State Bank of Pakistan (SBP). The notice was in response to a press report stating that the SBP had approved a scheme in October 2002 (during the military regime of President General Pervez Musharraf) to quietly write off recovery of loans worth about 54 billion Pakistani rupees (about US$861 million). The monies were owed to commercial banks by business concerns run by prominent politicians. The newspaper report, which was based on a report to the Public Accounts Committee of the Pakistan National Assembly, stated that about 50,000 people, including politicians, civilian and military business concerns, and business tycoons in Karachi, Lahore, and other cities benefited from the write-off scheme.

The report targeted two Chief Ministers of provinces as being beneficiaries of the scheme, because their families with large business concerns secured waivers on their outstanding loans. The scheme, prepared under pressure from some politicians, was approved by the then finance minister, Shaukat Aziz, and his financial team at the SBP. Aziz later became the Prime Minister.

Instead of taking steps to recover the non-performing loans (NPLs), the SBP issued an incentive scheme to the banks for waiving payment of NPLs of organizations showing a loss for three years or more by dividing them into three categories: Category A, NPLs of up to 500,000 rupees (about US$7,825); Category B, NPLs ranging from 0.5 million to 2.5 million rupees; and Category C (which covered most politicians), NPLs of more than 2.5 million rupees. In order to clear the balance sheets, the banks were advised to recover loans from Categories B and C by the sale of assets. (SC Takes Suo Motu Action on Massive Loan Write-Off, THE DAWN, Jan. 22, 2008, available at http://www.dawn.com/2008/01/22/top9.htm.)