Published On: Mon, Oct 17th, 2016

IMF warns Pakistan of CPEC bill challenges


IMF warns Pakistan of CPEC bill challenges

KARACHI: Chinese investments in Pakistan can potentially lift the country’s economy, but the repayment obligations that come with this investment will be serious, the IMF warned in its latest and final review of the China-Pakistan Economic Corridor.

“During the investment phase, as the ‘early harvest’ projects proceed, Pakistan will experience a surge in FDI and other external funding inflows,” says the International Monetary 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 CPEC related imports could reach 11 percent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2 percent of projected GDP in that year. Gross external financing needs of the country will jump almost 60 percent by then, from a projected $11 billion for the current fiscal year, to $17.5 billion in 2020.

Pakistan will see $27.8 billion in “early harvest” projects under CPEC in the next few years, with the remaining $16 billion 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 percent 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.

About the Author

Syed Ammar Alavi

- is Lahore (Pakistan) based journalist & writer with 25-year experience in print, wire and broadcast forms of journalism. His major fields of interest are politics, film,tv,sports, climate change and technology

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