ADB raises concern over CPEC’s debt burden on finances

MANILA: The Asian Development Bank (ADB) on Thursday raised concern about the debt burden of China Pakistan Economic Corridor- (CPEC) led infrastructure projects on Pakistan’s fragile finances.

“Countries should realise the economic viability of projects under belt and road initiatives,” Takehiko Nakao, ADB president told a news conference on day one of the ADB’s annual meeting.

“Sustainability, economic viability of such projects are difficult… investing borrowed money for infrastructure projects potentially pile up debt burden.”

Pakistan’s economy has seen growth accelerate in recent years but it has not been without problems. The economy witnessed over a decade-high growth of 5.3 percent during the last fiscal year and provisional 5.8 percent in the current fiscal year ending June 30. Current account deficit swelled to an eight-year high of five percent of the GDP or $12.029 billion in the first nine months of the fiscal year 2018. Government estimated current account deficit for the outgoing fiscal year at 4.4 percent or $13.7 billion, while it set a target of 3.8 percent or $12.5 billion for the next fiscal year.

The World Bank and the International Monetary Fund (IMF) have warned that the country’s macroeconomic picture has been deteriorating as its current account deficit widens.

Foreign reserves have also been dwindling for the last couple of years amid a spike in imports, including machinery for more than $50 billion worth of CPEC projects. Machinery imports account for almost a quarter of annual import bills of $53 billion.

Brokerage Topline Securities estimated that Pakistan needs to annually pay three to four billion dollars for a decade in loan repayments under CPEC after the fiscal year of 2019/20.

Machinery imports are, however, decelerating as CPEC-related projects are progressing to advance stage. China has remained a major thrust to foreign direct investment into Pakistan as it accounted for more than half of $2.094 billion of FDI in the July-March period.

Nakao said China-Pakistan economic cooperation is very impressive and “it has stabilised the macroeconomic indicators which have showed encouraging performance during recent years”. “The IMF is assessing the economic outlook of Pakistan and we will wait for the assessment and after that will see how much budgetary support the country needs for an interim period.”

The IMF has projected Pakistan’s external debt and liabilities could peak to $144 billion in the next five years from $93 billion in the current financial year of 2018. It also estimated that the country’s foreign currency reserves would continue to decline and could touch $7.075 billion by 2023 from $12.09 billion held by the State Bank of Pakistan.

More alarmingly, the total external debt servicing would reach $19.7 billion by 2023 against $7.739 billion in the FY 2018. The foreign debt servicing is projected to rise from $7.7 billion to $19.7 billion, indicating immense pressure on the country’s external accounts.

ADB President further said the bank wants to collaborate with the Asian Infrastructure Investment Bank (AIIB) to meet the region’s growing investment needs and does not see the emerging China-led lender as a rival.

Nakao said although China is an important international lender and borrower, its rise and that of the AIIB would not be motivating factors behind any changes in the ADB’s future strategy. He said the two institutions are different in many ways, which mean they could collaborate more effectively.

“AIIB, it’s not the kind of threat to us,” he added. “We can cooperate with AIIB because we need larger investment in Asia and we can collaborate.”

He said the AIIB had observed very high standards in terms of its programmes and the AIIB and the ADB this year hoped to approve several projects which they would co-finance. He did not elaborate.

The two have so far jointly provided combined loans of more than $700 million for four infrastructure projects, three of them in South Asia.

Nakao, referring to US-China tensions, said the ADB is concerned about protectionism and trade troubles as Asia would suffer, but there are so far no signs of that.

The ADB has forecast growth of six percent for developing Asia this year, fuelled by solid export demand, but it has warned that US protectionist measures and subsequent retaliation could undermine trade.

“If trade is interrupted, it will have large damage to Asian countries as well as to other countries in the world. If this continues to escalate, it will have negative impact,” Nakao said. “At this moment it does not have impact on sentiment of people, investors and market players.”

The May meeting comes as the Japanese-led ADB, formed in 1966 to help pull millions of Asians out of poverty, is watching closely as China asserts itself internationally via its vaunted Belt and Road Initiative and pushes regional infrastructure plans with support of its state-owned banks and the AIIB.

Key topics to be discussed are free trade, globalisation, ageing populations, environmental degradation, gender equality and the trend towards automation.

Nakao said he was optimistic there were more opportunities in Asia to create jobs rather than lose them to machines and software, and said developments in technology were helping to boost equality among populations.

The ADB estimates developing Asia needs to invest $1.7 trillion per year in infrastructure until 2030 to maintain its growth momentum and the regional lender’s targets on poverty and climate change.

Nakao said along with infrastructure development and poverty reduction, there was a need to introduce social security and universal health care to Asian economies and make progressive tax reforms.