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July 12, 2018

The repayment enigma


July 12, 2018

The China-Pakistan Economic Corridor (CPEC) is being termed as a game-changer for the country. But is Pakistan fully equipped to repay the costs related to it?

CPEC, which started off as a $46 billion investment, is presently valued at a whooping $62 billion. This is almost double the aid Pakistan has received from the US in the last decade-and-a-half. The series of investments under the backdrop of CPEC are not confined to a single project but spread across multiple dimensions – including infrastructure, energy, water, safety and security etc. Undeniably, an investment of such a magnitude, which is set to connect China’s Kashgar to Pakistan’s Gwadar, certainly does not come without a cost.

Contrary to public opinion in Pakistan, CPEC is not a gift from China, but rather an investment from the Chinese perspective. And they will surely call for the repayment of this investment in the near future. A report by the International Monetary Fund (IMF) estimates that by the year 2023-24, Pakistan will have to pay approximately $3.5 billion to $4.5 billion per annum. This outflow of money is set to put additional pressure on Pakistan’s already stumbling Balance of Payment (BOP).

Pakistan has historically been struggling with a persisting deficit in the BOP, which is primarily made up of exports and imports of goods and services. Now the bigger question: is Pakistan equipped to sustain this colossal cost in the future? The answer can only come from analysing Pakistan’s exports potential.

Pakistan’s exports this year have shown a mammoth 13 percent growth $24.8 billion projection in 2017-18, against $21.9 billion in 2016-17), compared to the mere five percent growth in the preceding financial year – owing mainly to a drop in the energy shortfall under the backdrop of CPEC investments in the energy sector. A projection, based on the data from SBP and the Pakistan Bureau of Statistics, underscores that if the exports in Pakistan grow at 10 percent per annum (a modest view than the 13 percent existing growth), CPEC repayments will not put any pressure on the BOP, as it will be financed through the export bill.

This silver lining is only possible if the government undertakes more projects to meet its continuously mounting energy requirements. This does not only mean excess production of electricity, but equally important is effective management of the existing energy production.

According to a report by the Pakistan Institute of Development Economics (PIDE), another dominating issue in the respective sector is of circular debt. It is the debt in which consumers, corporations, energy producers and government, all owe money to each other. And as energy producers fail to collect adequate payments to meet their cost, they are either forced to put more taxes or rely on the government to give them subsidies. In either case, the ultimate burden falls on the consumers.

Therefore, with the production of energy, Pakistan has to better manage the energy it is already producing. Once this sector is stable, which has a direct relationship with the exports sector, Pakistan shall easily be able to achieve the goal of 10 percent growth in its exports. And as deliberated earlier, a 10 percent growth in exports will be sufficient enough to repatriate CPEC related payments to China without any pressure on BOP.

The writer is a freelancecontributor.

Email: [email protected]

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