The International Monetary Fund (IMF) has warned the Pakistan government that it risks meeting its repayment obligations with regard to the USD 46 billion China-Pakistan Economic Corridor (CPEC) project despite it having the potential to lift the economy
This warning has been issued in the IMF's latest and final review of the just concluded programme, reports the Express Tribune.
"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 USD 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 USD 11 billion for the current fiscal year, to USD 17.5 billion in 2020.
Pakistan will see USD 27.8 billion in "early harvest" projects under CPEC in the next few years, with the remaining USD 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 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.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)