IMF again raises alarm over CPEC investment

ISLAMABAD: The International Monetary Fund (IMF) has again raised a red flag in the context of China Pakistan Economic Corridor (CPEC) and stated that in early 2022, new investment could raise growth prospects but contingent liabilities also pose a risk to debt sustainability.

“In early 2022, new investments through the China-Pakistan Economic Corridor (CPEC), originally established in 2013, were announced. Although infrastructure in these second-phase investments could raise growth prospects, attendant contingent liabilities also pose a risk to debt sustainability,” the IMF stated in its Public and External Debt Sustainability Analysis done alone with the Fund staff report released after the approval of EFF program for Pakistan.

The report states that Pakistan’s public debt continues to be judged as sustainable with strong policies and robust growth, but with greater uncertainty, in part because the fiscal relaxation in FY22H2 prevented the debt ratio reduction projected at the time of the sixth review. The debt-to-GDP ratio is now projected to rise from 77.9 percent at end-FY21 to 78.9 percent at end-FY22 before falling to around 60 percent by end-FY27, assuming the adjustment efforts in the context of the EFF program are fully carried out.

While gross financing needs (GFN) remain elevated over the near term amid sizeable fiscal deficits and limited progress in lengthening maturities, GFNs are projected to decline over the medium term — reflecting programmed fiscal consolidation and efforts to enhance cash and debt management —reaching 17.2 percent of GDP by FY27.

“Higher interest rates, a larger-than-expected growth slowdown due to policy tightening, pressures on the exchange rate, renewed policy reversals, slower medium-term growth and contingent liabilities related to SOEs pose significant risks to debt sustainability,” the IMF warned.

Sustained fiscal adjustment in line with program commitment and a favourable interest rate-growth differential are projected to put debt ratios back on a clear downward path. The rebasing of GDP, which raised nominal GDP by 16 percent, would itself lower the end-FY21 debt-to-GDP ratio to 75.8 percent (from 88.6 percent at the time of the sixth review).

In the updated debt sustainability assessment, this is partially offset by the inclusion of certain reserve-related liabilities (central bank swaps and deposits by foreign central banks) into the debt perimeter, raising the end-FY21 debt ratio by 2.1 percentage points.

On account of fiscal slippages in FY22H2 and the weaker end-FY22 exchange rate, the debt-to-GDP ratio is set to increase by 1 percentage point during FY22, reaching 78.9 percent, notwithstanding stronger growth due to stimulus-fuelled domestic demand.

News Desk adds: About 30% of Pakistan’s foreign debt is owed to China, including state-owned commercial banks, compared with 27% in February, according to a report released by the International Monetary Fund, Bloomberg reported.

Chinese debt to Pakistan has been revised upwards by $4.6 billion to about $30 billion, the IMF report said, from $25.1 billion in February. Chinese support is triple the amount of IMF debt and more than the amount given by either the World Bank or the Asian Development Bank.

The debt shows that China is now playing a similar role to the IMF by providing financing during balance of payments crises, rather than World Bank-style concessionary-project financing. Debt for balance of payments support from China has continued with loans to Pakistan being rolled over on a regular basis.