IMF Warns Pakistan on Repayment Obligations

The IMF has warned Pakistan that China’s growing investments in Pakistan have the potential to lift the Pakistan’s economy, but the repayment obligations that come with it will be serious.

The report estimates that CPEC related imports could reach 11 percent 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 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 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 IMF 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”, 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 3,000-km-long CEPC, which is part of China’s Silk Road project, officially called Belt and Road is aimed at connecting the two countries with rail, road, pipelines and optical cable fiber network.

It connects China’s Xinjiang province with Pakistan Gwadar port, providing access to China to the Arabian Sea.

The project, when it is completed, would enable China to pump its oil supplies from the Middle East through pipelines to Xinjiang cutting considerable distance for Chinese ships to travel to China. India has already protested to China over the project as it passes through Pakistan-occupied Kashmir.

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.