CPEC and IMF

In the final International Monetary Fund (IMF) review under the 6.64 billion dollar Extended Fund Facility (EFF) the government is cautioned on two counts with respect to the China Pakistan Economic Corridor (CPEC) widely believed to be a game changer. First, the Fund recommends forceful pro-growth reforms, prudent macroeconomic policies (including improving the business climate, strengthening governance/security, and export supporting reforms), prudent fiscal policy, and debt management to keep long-term public debt path sustainable. Ironically, the Fund, during the duration of the EFF, supported deficit reduction policies - anti-growth - and did little to restrain the government from incurring external and domestic debt which accounts for public debt rising by a whopping 2.5 percent of Gross Domestic Product in just three years (currently at 450 percent of total government revenue). Exports have been held hostage to an overvalued rupee as well as the need to show a higher revenue collection than was actually the case - the objective to meet the Fund's revenue targets - through mounting refunds (estimated at 205 billion rupees) and advance tax collections. Without reforms across a broad spectrum of government engagement, and sadly there appears to be no change in the thrust of policies by the Dar-led Finance Ministry, the CPEC may not be a game changer.
Secondly, the review advises sound project management and urges that a monitoring system should be in place to ensure timely implementation and mitigate risks defined as "prioritisation mechanism based on effective cost benefit analysis and realistic forecasts of macroeconomic and financing conditions." This is in line with what the Business Recorder has been suggesting to the government since the 46 billion dollar Memoranda of Understandings (MoUs) were signed between China and Pakistan. The Sharif administration has unfortunately picked those projects, and continues to do so, with the highest positive political fallout rather than those with the highest economic/internal rates of return and this has been done largely through giving over-optimistic numbers of beneficiaries. This tendency explains why the Fund advised effective, as opposed to doctored cost benefit analysis one would argue, of each project funded under the CPEC which in turn would have done away with all criticism by the government's political adversaries as well as allies of favouring Punjab in selection of the CPEC projects.
And most damning of all, the Fund suggests that power purchase agreements with Chinese IPPs should be negotiated with terms that would adequately incentivise investment while ensuring that the cost of generated power remains favourable for the distribution system and consumers. The report notes that the government during the past three years has increased base line electricity tariff by a whopping 32.5 percent - from 8.8 rupees per unit to 11.9 rupees per unit. And the only reason the public is not up in arms against this massive rise is because the international price of oil hit new lows during the past few years but, once the upturn begins, as has already commenced, electricity tariff in Pakistan would rise - a fact which would further disable us from competing in the export market and fuel poverty. The Fund also argues in favour of capacity improvements in the power transmission network to keep up with increasing supply as the government appears to be almost exclusively focused on generation knowing full well that the current transmission capacity is no more than around 16000MW.
It is critical to recall that earlier in the year the IMF hurriedly put together a technical assistance for formulating a law on public private partnership (PPP), currently under discussion in the National Assembly, that provides a legal framework to manage fiscal risks - read: a law that would disable the government from extending sovereign guarantees to private sector projects under the CPEC, required by the Chinese companies and agreed by Ahsan Iqbal's ministry that is playing a lead role in implementing the CPEC. In addition, the law suggests that the Ministry of Finance and not the Planning Ministry be the designated explicit gatekeeper in all stages of the PPP projects. Or in the words of the review "in order to contain fiscal risks it would be important to conduct a detailed feasibility study and value for money analysis for PPPs, strengthen the risk management system, bring all PPPs' contracting agencies into the regular coverage of fiscal accounts and debt statistics, establish a public register of PPP projects, and publish data on all PPP commitments to safeguard transparency and accountability." Such has been demanded by independent analysts as well as opposition parties and allies but so far to no avail.