GOP REVIVES THE IDEA OF REMITTANCE SECURITIZATION

C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 000782

SIPDIS

E.O. 12958: DECL: 04/09/2019
TAGS: ECON EFIN EAID PK
SUBJECT: GOP REVIVES THE IDEA OF REMITTANCE SECURITIZATION

Classified By: Ambassador Anne W. Patterson for reasons 1.4 (b) and (d)
.


1. (C) Summary: Finance Advisor Shaukat Tarin told the
diplomatic community that he plans to raise over $1 billion
through the securitization of workers' remittances through
UAE and Saudi banks. He will mention this plan at the
Donors' meeting, emphasizing that these are commercial
transactions which merely need facilitation from Saudi and
Emirati regulatory authorities. A Ministry of Finance
official confirmed that plans are underway to borrow a total
of $3 billion, but he believes that the GOP will be paying
too high a price for funds that, in his view, are not
urgently needed at this time. A similar scheme was proposed
prior to the IMF program, but was rejected then as being too
costly. End Summary.

2. (SBU) In a briefing to Islamabad-based Ambassadors on the
GOP's presentation at the April 17 Donors/Friends' meetings,
Finance Advisor Shaukat Tarin said that the GOP expects to
receive at least $1 billion in funds through the
securitization of workers' remittances from Saudi Arabia and
the United Arab Emirates. Under this plan, the GOP will
borrow dollars from banks in Saudi Arabia and the UAE, and
will repay the loans over five years with the funds that
overseas Pakistanis place with these banks to be sent onward
to Pakistan. As an additional layer of security, the GOP
will provide its sovereign guarantee for these loans.
Background
--------------

3. (SBU) A significant portion of the GOP's hard currency
inflows are in the form of workers' remittances, primarily
from Pakistanis working in the Gulf. In the fiscal year
ending June 2008, according to official figures, Pakistan
received $6.45 billion from remittances; of this, $1.25
billion came from Saudi Arabia, and $1.09 billion from the
UAE. Although there have been reports that the global
economic downturn is hitting the Gulf hard, post has not seen
a huge influx of returnees to Pakistan as yet, and
remittances have actually grown by 19 percent on an annual
basis, as of end-February. However, this continued growth
may not be a positive sign, as laid-off workers may be
cashing out of houses and cars, and remitting their severance
pay in advance of their eventual return to Pakistan.
How Does Remittance Securitization Work?
--------------

4. (SBU) Normally, remittances are paid into a foreign bank
by the overseas Pakistani and are always paid out in rupees
(never hard currency) to the Pakistan-based beneficiary
through a Pakistan-based bank. The hard currency transaction
shows up on the books of the State Bank of Pakistan as a
foreign currency inflow, however, improving the GOP's balance
of payments position. The GOP cashes the dollars and pays
rupees to the beneficiary's bank. Under the securitization
program, the GOP will borrow hard currency (dollars) from a
commercial bank in UAE or Saudi Arabia which has a history of
sending remittances to Pakistan. The GOP will give a
sovereign guarantee for this loan, but the foreign bank will
be repaid by the inflows from its overseas Pakistani clients
over the course of five years: essentially, the GOP will take
an advance on future remittances. While the loan will show
up as an immediate foreign exchange inflow on the GOP's books
and will go directly to the Ministry of Finance, over the
next five years remittance inflows will be reduced by the
amount of the loan. (Remittances will continue to be paid
out in rupees to the Pakistan-based beneficiary's bank, and
the beneficiary will not be aware of any change in the
process.)
Pros and Cons
--------------

5. (SBU) The foreign bank will charge the GOP market-based
interest rates, as this is a purely commercial transaction.
The advantage of such a plan is that the GOP would have
immediate access to large sums of money at interest rates
lower than what they would have to pay for unsecured
sovereign loans. However, these interest rates are still
relatively high, especially for five-year maturities, and we

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have heard that one reason the MoF abandoned a similar plan
last fall with the Saudi American Bank was that the interest
rate offered (four to five percent above the inter-bank
market rate, LIBOR) was too expensive. The other
disadvantage is that the GOP is effectively mortgaging future
remittances streams for the next five years, and if there is
another crisis (e.g., oil prices go up significantly),the
GOP will have already tapped this source of external finance.
The GOP must weigh this against whatever advantages accrue
from stockpiling the cash now and the political impact of
announcing a larger figure in Tokyo.

6. (SBU) A Ministry of Finance (MoF) official in charge of
the remittance program told us that the GOP hopes to raise $1
billion from the UAE and $2 billion from Saudi Arabia, both
to be repaid over five years, with a one-year grace period.
They are proposing to use the National Bank of Abu Dhabi and
the National Commercial Bank of Jeddah, the largest
commercial banks in each country. Since the transactions
would be market-based, at the Donors' meeting in Tokyo the
GOP would simply ask Saudi Arabia and UAE to have their
regulatory agencies facilitate these transactions. The MoF
official told us he said he had no idea what the current
interest rate might be.

7. (C) Tarin briefed the Ambassador on the idea of
securitizing worker remittances more than a week ago, arguing
that the proposal would ensure that the Donors' Conference
would reach the desired $4-6 billion pledge target and would,
therefore, be perceived as a success. Nevertheless, the plan
is controversial within GOP financial circles. The MoF
official told us that he opposed the GOP plan because
Pakistan's financial situation has stabilized, in his
opinion, and there have been large inflows of foreign
assistance recently. Therefore, there is no urgent need for
these funds at this time. Moreover, he expects Pakistan's
credit rating to improve soon (from CCC to B),enabling it to
borrow on an unsecured basis on better terms. The IMF
Resident Representative (protect) told us that, while he did
not oppose the plan, he did not see the pressing need for
this, and thought Pakistan should wait until after the
Donors' Conference before pursuing it. We expect, however,
that the GOP will push ahead with the plan contingent on SAG
and UAEG willingness to cooperate.
PATTERSON