CPEC, energy and external stability

The good is that investment in $55 billion CPEC and energy sector if implemented on schedule can help close the country’s power deficit, improve its fuel mix (see figure), and boost GDP. The warning is that it will likely create long-term balance of payments outflows. This is the summary of IMF’s take on the country’s largest investment plan and its impact going forward.

IMF has set forth its analysis on the realisation of 19 CPEC projects ($17.7 billion in energy sector and $5.9 billion in infrastructure) and several non-CPEC energy sector projects amounting to $25.4 billion that are either in advanced planning stages or already in the process of implementation. On the positive side, the country can close its generation capacity gap as most of the initiatives under energy sector investment and development have been on increasing the generation capacity using various sources of fuel (both for CPEC and non-CPEC projects), which will boost the economic growth not only from increased generation, but also from reduced reliance on furnace oil in shape of reduced costs, increased productivity and trade connectivity.

However, in reality, some serious concerns are being raised from various sides about the certainty of the impact of CPEC on the country’s growth rate. Bureaucracy has time and again assured that most of the financing under CPEC is in form of investment from China, and only a part of the funds is being provided in form of loans and that too at much affordable rates.

In the same context, the Fund also sets out a warning for the county’s policy makers; with various sources of financing like concessional government borrowing, private commercial financing, and not just plain foreign direct investment, CPEC and energy sector projects undertaken by the country are likely to face increasing government and CPEC-related external repayment obligations.

The IMF in its final review highlights that CPEC infrastructure and transport projects are being financed by long term concessional government borrowing from China, whereas CPEC energy sector projects involve foreign direct investment and commercial borrowing from Chinese financial institutions, either by majority foreign-owned joint ventures or Chinese investors. Unfortunately, with no publicly available data, it is difficult to actually dig out the specifics - something that the IMF too has not talked about in detail.

The IMF highlights that in the medium term; there will be a need for balance of payments (BoP) outflows in the form of loan repayment, profit repatriation, and imports of input fuel. Accordingly, the external financing needs are projected to increase to nearly 7.5 percent of GDP over the medium term, which can send jitters across the external sector in absence of macroeconomic and structural reforms.

Hence, the growth is largely linked to external stability. “Realising the transformational potential of Pakistan’s investment program while maintaining external stability will require supportive policy action”, says the IMF. And keeping and building up adequate foreign reserves to meet the BoP outflows along with strong and sustained reform efforts are essential to feel the impact of these large scale investments.