REPAYMENTS MAY HURT
Chinese investments in the CPEC are useful but related outflows need to be managed well, says IMF
The IMF has warned Pakistan that China’s growing investments in the country, including the $46-billion (Dh168.9 billion) economic corridor, have the potential to lift the cash-strapped economy’s potential output, but the repayment obligations that come with it will be serious.
“During the investment phase, as the early harvest projects proceed, Pakistan will experience a surge in FDI and other external funding inflows,” says the IMF in a short evaluation of the impact of ChinaPakistan Economic Corridor (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 international lender was quoted as saying by Dawn newspaper.
The report estimates 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 2.2 per cent of projected GDP in that year.
Gross external financing needs of the country will jump almost 60 per cent 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 IMF, 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 include repayments on the loans taken from Chinese banks for these projects, which are expected to rise after 2021. Repayments and profit repatriation “could reach about 0.4 per cent of GDP per year over the longer run”. The IMF acknowledges that CPECrelated 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 preconditions. In addition, “allowing greater downward exchange rate flexibility” will also be necessary.