A report released by the Institute of Policy Reforms on Friday claims that the International Monetary Fund emphasis to execute the China-Pakistan Economic Corridor within the overall envelope of the Public Sector Development Programme "is euphemism for placing limits on its implementation". The institute recognises that the corridor is a potential "game changer" for Pakistan.
The report has urged the government to disallow the bank to constrain "either the size or pace of its implementation". The report, written by Institute's Managing Director, Doctor Hafiz Pasha, responds to the bank's Staff Report issued two days ago. Based on figures provided by the government, the bank indicates that the overall investment under CPEC is about $45 billion. For energy projects, the outlay is $33.8 billion, equivalent to 75 percent of the total. The remainder, $10.6 billion, will be devoted to transport infrastructure.
The government plans to complete the Corridor transport projects by 2017-18. In addition, priority projects in the energy sector, which will create IPPs, are scheduled to add 10,000 megawatts by 2017-18. "Transport infrastructure projects will be financed by government-to-government longer-term loans on concessional terms. Energy-related projects will be in the nature of foreign direct investment, financed by commercial loans from Chinese financial institutions to Chinese investors in Pakistan," the report adds.
The institute is concerned at the bank statement on the Corridor. The bank says the transport infrastructure projects "will be executed within the overall envelope of the public sector development programme". The bank expects the government to "prioritise the infrastructure project execution such that they remain within an overall fiscal envelope aimed at a gradual debt reduction". "As such, it emphasises that potential fiscal risks will need to be mitigated."
The report also says the bank has, in a subtle way, signalled its concerns on the Corridor. The basic issue is one of the "fiscal space" to absorb the Corridor infrastructure projects. Clearly, there will need to be a big hump of public investment because of the Corridor in 2016-17, 2017-18 and thereafter. Already, in 2015-16, 16 projects of the Railway and the National Highway Authority have been included in the Federal Public Sector Development Programme. The combined cost of these projects is up to Rs 334 billion. An allocation of up to Rs 16 billion has been made to these projects for the current year.
The report goes on to say the rise in public investment in the next two years will necessitate a big increase in the federal programme and a corresponding upward adjustment in the size of the fiscal deficit. On the assumption of the 40-percent implementation in 2016-17 and the remaining 60 percent in 2017-18, the allocation for the Corridor projects will have to be close to Rs 440 billion and Rs 660 billion, respectively, in the next two years.
Based on the same pruning in allocations to the ongoing projects, the federal programme at the federal level will have to be larger by at least Rs 350 billion in 2016-17 and by Rs 550 billion in 2017-18. This will imply a jump in the level of government investment by 1.2 percent of the gross domestic product in 2017-18 and 1.7 percent of it in 2018-19.
"The latest 'medium-term economic framework' prepared by the IMF [International Monetary Fund], after the eighth Review, makes no provision for a big rise in government investment in the next two years, from the projected level of 3.8 percent of the GDP [gross domestic product] in 2015-16. In fact, a significant drop is proposed in 2016-17 to 3.4 percent of the GDP, rising somewhat to 3.6 percent of the GDP in 2017-18. "Does this mean that the bank is expecting the Public Sector Development Programme allocations to the on-going projects to be cut back drastically over the next two years, or for the implementation of the vital transport infrastructure projects to be staggered over a longer period? Either option is unacceptable," the report adds.
It then urges the Ministry of Finance to emphasise to the bank's mission during the forthcoming review that the present medium-run macroeconomic framework is inadequate. The projected level of investment by the government in 2016-17 will have to be raised from 3.4 percent to almost 4.6 percent of the GDP and in 2017-18 to 5.3 percent of the GDP. There will also have to be a corresponding increase in the projected fiscal deficit from 3.5 percent to 4.7 percent of the GDP in 2016-17 and from 3 to also 4.7 percent of the GDP in 2017-18. The present bank programme comes to an end in September 2016. It is absolutely essential that at least for 2016-17 the relevant projections are revised upward.
There are other implications. Imports will be larger of machinery and materials, financed by larger foreign (Chinese) assistance or FDI. Public external debt will rise at a faster rate, by almost $11 billion by 2017-18. Commercial borrowing for power projects will add substantially to private sector external debt. None of this has been factored into the medium-term projections contained in the 8th Review report. The report suggests that following the bank's advice on this account will affect the country's growth and development.
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