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

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

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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Reader Comments (25)

  • sam ganguly
    Mar 12, 2017 - 11:28AM

    Will not it create a big, i mean really big hole in the pakistani economy? Too much for too little gain.Recommend

  • Manu
    Mar 12, 2017 - 11:45AM

    Take another loan and everything will be ok for now.Why worry about the future when our Iron Brother can give loan at small interest rates.Recommend

  • Amar
    Mar 12, 2017 - 3:55PM

    No bank would lend Pakistan 50 billion dollars period and also with Cpec we will benefit by becoming trillion dollar economy in that period we Pakistanis want stuff for free life doesn’t work like thatRecommend

  • Cautious
    Mar 12, 2017 - 5:01PM

    The real question is how is Pakistan going to generate the addition $3.7 Billion each year to fund this debt? Since most of this debt is associated with production of energy how much of this debt is going to be paid with higher utility rates and how much are those rates going to increase? Recommend

  • Ahmar Khan
    Mar 13, 2017 - 12:33AM

    Sensationalism from express tribune as usual. The report itself says that payments will be made out of tariffs and transportation revenue.

    The amount for additional repayment would be generated from the expected surge in exports, drop in imports and increased inflow of remittances.

    Pakistanis won’t be paying the mark up but the importers/exporters and freighters using this corridor will be paying for it through transit fees.Recommend

  • Ali Khan
    Mar 13, 2017 - 2:13AM

    Shame on you express tribune Recommend

  • Shakil
    Mar 13, 2017 - 3:32AM

    These so called economists miss in these calculations that investment will create a sustainable revenue generation from CPEC with transit fees, job generation and allied vendor industry creation like heavy logistic lorries, supply chain, warehousing, improved import and export to China, Central Asia on top of transit route.

    If Pakistan have the money, they can invest themselves and dont have to get the loan from China and will not have to pay back and only have income from road, rail and gas pipelines. Its a strategic project and will change Pakistan economy in much better way! Recommend

  • Omaga
    Mar 13, 2017 - 4:29AM

    It is understood that Pakistan has very limited options probably no other option for foreign investment. Pakistan should use this opportunity (foreign investment) very wisely. Only those project should be included that are very very vital for long term development like mega dams. Such projects should be financially sustainable with good Internal rate of returns.Project like wind mills, solar parks, metro and circular rails should not be part of CPEC. Pakistan should lean from Sri Lanka Hambantota port where Srilankan’s have to surrender their sovereignty Recommend

  • hzr
    Mar 13, 2017 - 5:19AM

    There are no free lunches and Chinese are very shrewd businessmen. They have prospered everywhere including Malaysia and Indonesia where they are resented.Recommend

  • Humza
    Mar 13, 2017 - 5:41AM

    @Cautious: I am always amused by the number of Indian commentators who are so desperate to paint CPEC in the worst possible way. Why does it bother you whether the Pakistani nation has to be 90 billion or 900 billion? Frankly everyone in Pakistan is looking forward to the the transformation that CPEC will usher in. The spin off industries and businesses what will stem from CPEC will more than cover any costs and interests. This is Pakistan’s chance to take off but the very fact that Indians are screaming hoarse to put it down at every opportunity will not change the reality of an economic transformation that already has Pakistan’s economy improving in the eyes of all major Western financial institutions.Recommend

  • Dipak
    Mar 13, 2017 - 5:50AM

    It doesn’t mean anything. Pakistan can afford any amount. You know why? They are always in Chapter 11.Recommend

  • Vicar
    Mar 13, 2017 - 7:14AM

    Fear not Pakistan will be the richest nation in the world after CPECRecommend

  • Ruby
    Mar 13, 2017 - 8:59AM

    That is not a bad number. That would have been a reasonable deal for Pakistan. But I believe this brokerage house people are not professional economists. CPEC companies are getting tax exemption for the capital goods they bring in to Pakistan, tax incentives on their returns, favourable prices, and sovereign guarantee on many payments. This is dangerous even for a large economy like Pakistan.

    If it is just calculation of direct payments to Chinese companies, a school kid can do that based on interest and tariff rates. Why do you need these brokerage houses?Recommend

  • Zubair
    Mar 13, 2017 - 9:40AM

    The money is better spent paying back loans than stashed in foreign bank accounts. We need infrastructure and development. Recommend

  • Mostly Bull
    Mar 13, 2017 - 10:15AM

    @Ahmar Khan: Sensationalism from express tribune as usual. The report itself says that payments will be made out of tariffs and transportation revenue…..yes, you forgot tea shops and tolls and towage fees…..pak will become gazillion economy after cpec.Recommend

  • James Micheal
    Mar 13, 2017 - 1:30PM

    The value of 90 billion US $ will be not same as of 2017 in 2025
    The current help by China has huge opportunity cost and Pakistan must go in way as China needs CPEC
    Pakistan will benefit from this and increased income may reduce the appeal to parochial social vision and Pakistan will turn to a Kemalist Turkey or Azerbaijan under AliyevRecommend

  • vinsin
    Mar 13, 2017 - 2:41PM

    @Humza:
    Why Pakistani are obsessed with Bollywood and Indian regional, state, municipal etc elections?Recommend

  • ishrat salim
    Mar 13, 2017 - 2:43PM

    Quote ” The amount for additional repayment would be generated from the expected surge in exports, drop in imports and increased inflow of remittances ” unquote.

    surge in export is no where in sight as per in intentions of the govt.
    Import is already on the rise & is not expected to slow down.
    remittance is already in decline due to oil prices & overall world economic situation.

    All the above factors is going negative, thus the situation is not very bright. Recommend

  • D Kamal
    Mar 13, 2017 - 3:03PM

    The fact of the matter is 90% of this loans are concessionary with an interest rate of as law as 1.5% on 10 billion over a 25 to 30 years. It is on Chinese New Exim bank. No other country would lend to making at 56 billion USD the IMF and world banks going rate is 7.5% and if they did lend this much money to Pakistan in an unlikely event it would be far greater it would easily cross 11% barrier with stringent reforms imposed so you can never claim out of the debt spiral. China is wanting to up its own world bank with the UK and few other counties. As most counties realised IMF and World Bank loans impose heavy penalties for not implementing almost impossible reforms. It makes no sense for China to make Pakistan bankrupt as this is a stragic investment for China to have quick access to Europe, African and Russian markets to about bottleneck in its current structure. China is worried about being blockaded hence the ORB an CPEC investment.Recommend

  • israr
    Mar 13, 2017 - 6:16PM

    CPEC is china Pakistan economic corridor which means china is using route through Pakistan to access world market which will decrease their cost of sales hence increasing their profit, so what is Pakistan getting from this CPEC there must be money paid to Pakistan by china using the route, i understand there are services which we are providing china, that includes security good roads and other facilities like use of Pakistani goods both argicultural and minerals.

    why are we getting loans we should not be borrowing any money from china infact china should be investing in Pakistan like circular railway i can assure you both kpk and karachi ones will return profits so much that it will cover the cost of those projects in 2 years so the contract should be that after 20 years the assets will be owned by Pakistan, govt of Pakistan should not be looking to give any subsidy to anyone let the chinese investors decide the fare of these services too many confusions ….Recommend

  • Tahir Jawaid
    Mar 14, 2017 - 2:12AM

    It is amazing how a G2G framework agreement can take so many meanings. Dont understand why GOP is not willing to share information openly, what is so sacred about.

    Loans for piwer sector is on commercial basis and is LIBOR+4.5% and for public projecrs there is a lower undisclosed rate if it is less. So if LIBOR goes up which is the current trend payments for 10 yr loans for power prijects will increase. All the aforementioned info is widely available in various tariff determinations by NEPRA hence no secret.

    It will bring in new power plants with major development and very imported coal and will open up thar for using local coal. Still nothing wrong in it.

    In the process pakistan will end up huge dollar based debt which needs to be paid back over 10 to 15 yrs and $ based equity returns for next 30 yrs. There will be affitional funding required for imported coal and due to gop urgency to bring power has invested in 3×1200 mw lng based plants and would need $ for fuel import, both fuel $ requirement are not part of nos given the article.

    Now look around is $ economy expanding, have we made investment in textile or other export based industry. If no work done than we can head for serious crisis.

    Low info, no one asking hard questions. There could be real surprises.

    All could be fine if there is end to end game plan, improvement in power dues recovery so that people and govt pays for what thry use, reduction in power theft to reduce lost rev etc.

    What is required, investment in infrastructure and than coirdinating other elments of economy to synchronize, prima facie does not appear to be so, best of luck pakistan, you will not be the first or the last one who got suckered into a debt trap………Recommend

  • Ankit
    Mar 14, 2017 - 2:23AM

    Still, it will be profitable venture for Pakistan in long run. After CPEC, when infrastructure projects will complete, then the sources of revenue will also be generated, also the value 90 billion dollar will not remain same. Its a good move by Pakistan, however they should remain conscious. Recommend

  • Rao
    Mar 14, 2017 - 4:54AM

    There are always too many pessimistic doomsday day sayers in Pakistan . When CPEC is built , no body in the right mind, can refute the fact that it will turn the country I nto a future Asian Economic Tiger and paying 3-4 billion dollars to China will not be difficult at all. What China can do if there are temporary defaults ? Remember China needs Pakistan for smooth operation of the system and simply can not alienate Paks, for it is not a push over and Chinese designs could be brought to a halt. Pakistan is a major regional power with nuke armed military and Chineese know it. Remember not long ago, Pakistan stopped supply route of NATO during Afghan war and Americans did apologized!Recommend

  • avtar
    Mar 14, 2017 - 5:05AM

    @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!!!Recommend

  • Rahul
    Mar 14, 2017 - 5:26AM

    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 . Recommend

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