KARACHI: Projects being executed under the China-Pakistan Economic Corridor (CPEC) need more transparency in order to build a better picture of the debts being taken on, and the future foreign exchange requirements for servicing these debts, says the IMF in a recent conference call with journalists.

“We believe it’s important that information on contracts should be provided transparently as soon as it emerges so that we can factor it in” said Harold Finger, mission chief for Pakistan at the IMF, who spoke with journalists in a conference call on the conclusion of the 9th review and Article IV consultations with the government.  “The details and terms are evolving. We are monitoring the impacts on fiscal and external sector in near to medium term” he added.

His remarks were in response to a question asking how far the IMF has been able to build an accurate picture on how the debt service obligations being accumulated under CPEC projects will impact debt sustainability in the future.

In follow-up remarks given to Dawn after the conference call, Mr Finger said that the fund would “use the occasion of our upcoming programme discussions to update our understandings and discuss the outlook and economic implications of the still evolving project”.

He underlined an earlier analysis provided by the fund saying “to reap the full benefits of CPEC, risks will need to be well-managed. This requires sound practices in the evaluation, prioritisation, and implementation of public investment projects, along with strong procurement and public financial management systems.”

Thus far, the IMF’s debt sustainability analysis for Pakistan has given the country a clean bill of health for the near term. In its October review of the programme, the IMF had pointed out that CPEC projects are divided between transport and energy as crucial areas of focus. In transport, the projects are largely government-to-government financing, but in energy they are coming in the form of FDI, on commercial terms, and debt service obligations along with sovereign guarantees built into the Power Purchase Agreements (PPAs).

In its annual report, the State Bank has said “the government has estimated disbursements of Rs 207 billion (around $2.1bn) from China” in ongoing fiscal year, which is the largest bilateral commitment out of them all.

“PPAs need to be agreed in a way that mitigates potential fiscal risks, and to prioritise infrastructure project execution such that they remain within an overall fiscal envelope aimed at gradual debt reduction”, the IMF cautioned in its October report, appearing to point towards the sovereign guarantees being issued in the power purchase agreements, and mindful of the continuing burden of the circular debt on the fiscal framework.

“The government of Pakistan will guarantee IPPs’ energy sales through Power Purchase Agreements (PPAs) at pre-determined tariffs by Nepra. Final implementation of all projects will be contracted to Chinese suppliers who will import the necessary machinery as well as part of the manpower and raw materials”, that report had pointed out, raising questions about the future foreign exchange requirements of executing CPEC projects, as well the fiscal burden that the power purchase agreements will place on future governments.

It is not clear whether the fund has been able to view the nature of the sovereign guarantees being extended, or the power purchase agreements, but the language used by Mr Finger, and the fund report, indicated that the staff is working with whatever data is provided by the government at its discretion.

The governor of the State Bank of Pakistan has already said that greater disclosure is needed on CPEC projects, especially the future debt service obligations being taken on under them, and what commitments are being given that could impact the fiscal framework.

Published in Dawn, January 13th, 2016