The International Monetary Fund has come up with its analysis of the China-Pakistan Economic Corridor (CPEC)-related projects, with a word of caution stating that the cost of the projects is likely to strain 0.4 per cent on the economy..
The experts, however, believed that the cost would be covered through “anticipated growth-supporting and export-enhancing reforms and infrastructure development.”
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 in 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 total size of CPEC is estimated at around $46 billion (about 16 per cent of FY2015/16 GDP), of which more than half ($28 billion) is allocated to “early harvest” projects over the next few years, with the remainder of the investments expected to materialise up to 2030 and beyond.
The IMF report stated that profit repatriation by Chinese companies would begin to rise in the subsequent years after operations of Chinese power produces.
“The path and size of the repatriation would depend on factors such as the timing of the project completion and the terms of power purchase agreements with the Pakistani government, it could add up to significant level given the magnitude of the FDI (foreign direct investment),” the IMF said.
The IMF report said during the investment phase, as the early harvest projects proceed, Pakistan will experience a surge in foreign direct investment and other external funding inflows.
A concomitant increase in imports of machinery, industrial raw materials and services are likely to offset a significant share of these inflows. The current account deficit will widen with manageable net inflows into the balance of payments.
While precise quantification of these impacts is difficult due to uncertainty and lack of available information, the IMF projects CPEC-related capital inflows (FDI and external borrowing) to reach about 2.2 per cent of the projected GDP in FY2019/20 and CPEC-related imports to about 11 per cent of the total projected imports in the same year.
-Macro-economic impact-
In a special chapter on the macro-economic impact of the CPEC, in its departing note to Pakistan on the conclusion of the $6.15bn three year programme, the IMF said the CPEC would boost investment and growth in the short run and entail risks of repayment obligations and profit repatriation in the medium to long term period.
Therefore, it advised Pakistan to manage the initiative carefully and negotiate power sector agreements transparently, to keep their outcomes favourable to the distribution system and affordable to consumers, because of their impact over a period of three decades.
Some CPEC priority projects are already under way, which contributed to a pickup in FDI, imports of machinery and industrial materials, and the government’s external financing in the fiscal year 2015-16.
CPEC transport infrastructure projects (e.g. roads, railways, port facility upgrade) would allow easier and lower-cost access to domestic and overseas markets, promoting inter-regional and international merchandise trade. Service exports would also benefit from the increased trade traffic from China. Furthermore, these CPEC projects could catalyse private business investment and boost productivity.
Over the longer term, Pakistan will need to manage increasing CPEC-related outflows. As Chinese IPPs start their operations, profit repatriation by these companies would begin to rise in the subsequent years. While the path and the size of the repatriation would depend on project completion timing and the terms of the power agreements, it could add up to a significant level, given the magnitude of the FDI.
Repayment obligations to CPEC-related government borrowing, including amortisation and interest payments, are expected to rise after fiscal year 2020-21 due to the concessional terms of most of these loans.
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.
