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IMF warns of looming CPEC bill

Updated October 17, 2016

GROWING Chinese investments in Pakistan have the potential to lift the economy’s potential output, but the repayment obligations that come with this investment will be serious, warns the IMF in its latest and final review of the just concluded programme.

“During the investment phase, as the ‘early harvest’ projects proceed, Pakistan will experience a surge in FDI and other external funding inflows,” says the Fund in a short evaluation of the impact of CPEC related investments on Pakistan. However, the import requirements of these projects “will likely offset a significant share of these inflows, such that the current account deficit would widen” within manageable levels during these years.

The report estimates that CPEC related imports could reach 11 per cent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2pc of projected GDP in that year. Gross external financing needs of the country will jump almost 60pc by then, from a projected $11bn for the current fiscal year, to $17.5bn in 2020.

Pakistan will see $27.8bn in “early harvest” projects under CPEC in the next few years, with the remaining $16bn coming over a longer timeline stretching out to 2030.

“Pakistan will need to manage increasing CPEC-related outflows,” warns the Fund, once the Chinese investors begin repatriating profits, adding that the amounts involved “could add up to a significant level given the magnitude of the FDI”.

Outflows will also come in the form of repayment obligations on the loans taken from Chinese banks for these projects, which are expected to rise after 2021. Both of these, repayments and profit repatriation, “could reach about 0.4 per cent of GDP per year over the longer run”.

The Fund acknowledges that CPEC related growth could cover these payments over the longer term, but warns that this is not guaranteed.

“Reaping the full potential benefits of CPEC will require forceful pro-growth and export-supporting reforms” the report says, citing improved business climate, governance and security as necessary preconditions to enable CPEC investments to generate the resources required to cover their own associated outflows. In addition, “allowing greater downward exchange rate flexibility” will also be necessary.

The matter of rising CPEC related outflows was discussed between the Fund staff and the government during the discussions prior to the review. The government told the Fund that “additional Chinese investment over the longer term, building on CPEC as a platform, could also help cover the projected CPEC related outflows,” according to the report.

For the Fund, CPEC outflows are one of the medium to long term risks facing Pakistan’s economy. It calls for “sound project evaluation and prioritisation mechanisms based on effective cost-benefit analysis and realistic forecasts of macroeconomic and financing conditions” to help mitigate the risk.

It points out “a need to ensure transparency and accountability in project management and monitoring”, pointing specifically at the power purchase agreements being signed with Chinese IPPs, calling on the government to ensure that the cost of power purchase “remains favourable” for the distribution companies and consumers.

Published in Dawn October 17th, 2016