KARACHI: Pakistan is trying to offset the impact of an increase in capital goods’ imports under the China-Pakistan Economic Corridor (CPEC) by imposing 100 per cent cash margin on a number of items, said a latest report by international rating agency Moody’s.

The State Bank of Pakistan (SBP) recently introduced 100pc cash margin requirement – foreign currency for the full purchase amount – on certain imported consumer goods, including vehicles and home appliances.

“Through these measures, the government intends to partly offset the increase in capital goods’ imports under the CPEC infrastructure development project, which we expect will continue to widen the trade deficit as the project picks up,” said the report.

Import controls are credit negative for Pakistan because they signal policymakers’ limited tools to mitigate a persistent widening of the current account deficit, it added.

The cash margin requirement on the imports of vehicles and appliances will likely curtail purchases of these items. However, such controls tend to be porous and some transactions will likely move to unofficial markets to avoid them. Moreover, the new requirements are unlikely to fully offset other factors that will weigh on the current account.

“We expect the current account deficit to continue to widen in the foreseeable future, to 2pc of GDP in 2018,” said the report.

The widening of the current account deficit will be driven by continued expansion of the trade deficit, subdued growth in remittance inflows from Gulf Cooperation Council (GCC) countries and increased interest payments on external debt related in particular to CPEC projects, which are recorded as negative primary income in the current account, it added.

Workers’ remittances have accounted for 32pc of the country’s current account receipts on average over the last five years, and around 6.5pc of GDP providing critical support to Pakistan’s balance-of-payments stability in the past.

However, total dollar remittances shrank 2.4pc year-on-year in the second half of 2016 after expanding 5.7pc during the same period a year earlier. Around 64pc of Pakistan’s total remittances come from GCC economies.

“Given our assumptions that oil prices will not increase significantly over the next two years, we expect that many of these countries will undergo lasting economic adjustments that weigh on employment trends and remittance outflows from the region,” said the report.

“At the same time, we expect external debt interest payments to rise as a result of the financial inflows that will accompany CPEC projects. The $45 billion China-funded investment deal to boost transportation and power generation infrastructure in Pakistan should gradually bolster Pakistan’s growth potential by reducing supply-side bottlenecks,” said the report.

“However, in addition to foreign direct investment inflows, project capital expenditure and imports will also be financed through external loans. As a result, interest payments on such debt will contribute to a steady increase in income outflows, thereby exacerbating the current account deficit,” said the report.

The report said the expected increase in CPEC-related bilateral foreign currency debt could weigh on future foreign exchange reserves adequacy.

“How Pakistani policymakers choose to handle such external balance of payment pressures related to the CPEC will affect our assessment of the sovereign’s credit quality,” said the report.

Published in Dawn, March 3rd, 2017