Pakistan will be paying China $90b against CPEC-related projects

Brokerage house says expected return on investment to be 40% amid inclusion of more projects in CPEC

Salman Siddiqui March 12, 2017
Prime Minister Nawaz Sharif meets Chinese President Xi Jinping. PHOTO: REUTERS

KARACHI: Pakistan will end up paying $90 billion to China over a span of 30 years against the loan and investment portfolio worth $50 billion under the China-Pakistan Economic Corridor (CPEC), report of a brokerage house estimated.

The estimated return -  sum of principal and interest on foreign currency debt and repayment of profits/dividend on equity investment - shows 40% return on investment.

The amount increased to $54 billion after the inclusion of more projects in CPEC such as investments in Pakistan Railways and financing of the Karachi Circular Railways project. The volume of return would increase accordingly. Infrastructure and power projects - part of the CPEC portfolio and divided across time in terms of priority - are expected to be completed by fiscal year 2030.

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Topline Securities, in its report, said leading economists have estimated annual average repayments of $3-4 billion per year post fiscal year 2020.

“Average annual repayment of CPEC will be $3 billion. {However, in medium term} between fiscal year 2020-25, it will range between $2.0-5.3 billion with average payment of $3.7 billion,” Saad Hashemy, an analyst at the brokerage house, said in a report titled, ‘Pakistan’s External Account Concerns and CPEC Repayment’.

Another valid concern is over the repayment of CPEC-related projects. This is because most projects are being funded abroad and Pakistan is not seeing any significant inflow of foreign exchange.

“It should be noted that project financing for CPEC is being done between Chinese companies and banks and around 25% of CPEC investment is expected to come in Pakistan,” he said. The report argued the repayment would remain manageable despite additional burden of debt servicing and repatriate of profits on equity investment in CPEC. The amount for additional repayment would be generated from the expected surge in exports, drop in imports and increased inflow of remittances.

Trade

The brokerage house assumed exports to grow by 4.5% a year till fiscal year 2025, which is higher than the previous decade’s average of 3%. This is because of expectation of CPEC-led higher GDP growth in the coming years and positive impact on local industry.

Imports are expected to grow by 4% in line with last decade’s average. Further, remittances are expected to grow within 4-4.5%, which is lower than last couple of decade’s average of over 7% as Pakistani diaspora has to a great extent shifted to official channels of transferring money.

“We expect current account deficit to remain on average at 1.5% of GDP between FY20-25 at a range of 1.2%-1.8%,” it said. In addition, Arif Habib Limited estimated, CPEC-related transportation would earn $400-500 million per annum to Pakistan, which would be sufficient for repayments.

Revised macro estimates

At the same time, Topline Securities said Pakistan’s current account deficit (CAD) in the first seven months of current fiscal year 2017 remained much higher than expectation at $4.7 billion, which is 88% higher than last year.

“The higher CAD was mainly on account of weak exports of $12.3 billion, which posted a decline of 1.3% while imports of $25.5 billion increased by 9%,” it said. “Given the large CAD..., we are revising up our CAD forecast to $6.6 billion (from previous $4.7 billion), which is 2.2% of GDP,” it added.

“Given higher CAD, we are revising down our year end forecast of foreign exchange reserves to $22-23 billion from previous estimate of over $25 billion. “These are all time high foreign exchange and provide 4-5 months of import cover (accounting for only reserves with State Bank of Pakistan of $17-18 billion),” it said.

Published in The Express Tribune, March 12th, 2017.

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COMMENTS (25)

Rahul | 3 years ago | Reply | Recommend CPEC will poorly benefit pakistan in terms of infrastructure.all the analysis miss the elephant in the room that it will cost 10 times more the transport cost n time if they go through this so call economic corridor Since sea route r cheaper n safer quicker n all the major exporting industries lies in eastern part of China plus Pakistan has no vibrent maket and Pakistan has nothing to sell to China , not even a foolest business man will not used this corridor . It will b a fail project . Hence no need to go through all this dollar tag investment numbers .
avtar | 3 years ago | Reply | Recommend @israr: You made a good point re lowering the cost of sales for Chinese exporters. But how does one lower the cost when the Chinese are going to be shipping by rail/road (hoping the oil prices to stay low) for 3,000 miles versus shipping via sea. Cpec would provide an alternate route! I also the see the cost of security to be high. Pakistan Military has hard time for American military goods to pass through territory safely to Afghanistan! And the US pays handsomely to Pakistan from Coalition Support Funds (and is booked as Export revenue). Would Chinese pay Pakistan approximately $1B to Pakistan annually!!!
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