CPEC liabilities and repayments

Recently, a news item appearing in The Express Tribune highlighted that the CPEC investments of $26.5 billion would eventually lead to $40 billion of outflows over 20 years. The government was quick to issue a rebuttal and claimed that government liabilities related to CPEC are only limited to $6 billion.

This is not the first time this controversy has been raised and there have been various conflicting reports on CPEC-related liabilities. It is, therefore, important to objectively look at this issue and unpack this discussion.

There are three intertwined issues that must be looked at separately. Firstly, the CPEC investments include both government-to-government borrowing and commercial loans and investments. The government’s direct liability of $6 billion may be a small part of the overall CPEC portfolio, but most of the commercial investments under CPEC are also guaranteed by the government and would, therefore, add to its contingent liabilities. The government must, therefore, also disclose its CPEC-related contingent liabilities, whenever it mentions its direct liabilities.

Moreover, the balance of payments does not only depend on government borrowing, and any profit repatriation is also reflected as current account outflows. The CPEC-related outflows of $2-3 billion per annum for the next few years, on account of total investment of $26 billion, would, therefore, have a direct bearing on Pakistan’s balance of payments, irrespective of the fact that CPEC energy projects were undertaken in the IPP mode.

The second issue pertains to Pakistan’s ability to repay CPEC loans and manage other outflows. Pakistan’s total external debt is close to $100 billion. Not only does the CPEC-related government debt constitute a mere 6% of this external debt stock but it is almost as high as the recent deposits committed by the UAE and Saudi Arabia in the last two months. Moreover, Pakistan’s multilateral debt is at least 4-5 times the CPEC debt. It is, therefore, absurd to claim that CPEC loans have added significantly to Pakistan’s debt burden.

Furthermore, the balance of payments is a much larger issue for Pakistan, with CPEC playing a minuscule role in it. Considering Pakistan’s annual imports of more than $60 billion, the expected annual CPEC-related outflows only account for 15-20 days of the import bill. Isn’t it prudent to slightly rationalise our imports to pay for the assets that we have built under CPEC?

The third issue is the terms and conditions of CPEC financing. While the interest ranged from 2% on concessional loans to as high as LIBOR + 4.5% for commercial loans, it were the equity investments that were perhaps the most expensive. Assuming a 75:25 debt-to-equity ratio, the equity part out of $16 billion CPEC energy portfolio should stand around $4 billion. Against this investment, the dividend payments are expected to be almost three times or $11.4 billion. This is because of the excessively-high return on equity (ROE) ensured on these projects. On coal power projects, for instance, the ROE was as high as 27-34% for 30 years, even for imported coal. What exactly are the reasons for allowing these disproportionately-high returns for an environmentally-hazardous technology, and that too in a time period when the costs of renewable energy are sliding down, remain unclear.

However, we must realise that CPEC has provided the much-needed infrastructure financing for Pakistan, leading to improved power-generation capacity and better connectivity, and now it’s for us to make best use of this improved infrastructure.

The real focus of CPEC, therefore, should not be on mulling over repayments of contracts that have already been agreed upon by both countries and rather on how we can increase our exports, encourage Chinese industry to relocate to Pakistan and form better business linkages with China. If we do it right, we can more than compensate for these outflows.

Published in The Express Tribune, January 1^st, 2019.

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