Recently the debate in media has caught fire on external outflows, including debt repayment, on CPEC-related projects over the next 30 years. The journalists and analysts community picked it up from Saad Hashemys of Topline Securities report on 'Pakistan external account concerns and CPEC repayments'. The media reports and Ahsan Iqbal's reaction to the same suggests that neither of them have really read the report, nor have they understood the gist of it.
All they picked up is that for $50 billion inflows under CPEC which are assumed to be materialized in 15 years, the outflows, including equity related repatriations, sums up to $90 billion in 30 years time. And the debate started that debt repayments will be $90 billion and Ahsan countered this on social media that the number is not actually government debt.
Readers need to realize that Toplines writer is assuming that CPEC has an overall positive impact on the economy, and all the narration was on related external obligations in the medium to long term and was not written to raise alarms.
BR Research was the first one to write on external accounts concern related to CPEC and other external loans in 2014. Read "The dark underbelly of external loans" published on published May 21, 2014; and later a conference was organized on the said subject by this newspaper in collaboration with the Islamabad-based think tank called Prime Institute.
The point here is notto politicize the issue and call a spade a spade. The average annual repayment of CPEC projects calculated by Topline at $3bn for 30 years is realistic, and many others are coming up with similar numbers. The need is to understand that it's not all debt repayment, and even within debt, the government's portion is a mere fraction.
Out of $50 billion CPEC projects, $35 billion are for power projects and majority of these are in private sector domain. The debt to equity assumed by Hashemy is 75:25 debt equity ratio with equity return of 17 percent and debt is assumed at 3 percent. This implies the total project returns outlay of 6.5 percent and one third of outflows are equity related assuming all the equity is Chinese. And if the partial equity is from domestic investors, the foreign repatriation declines proportionately - such as the case of HUBCO coal and Thar coal projects where local investors are partners to Chinese.
In the case of infrastructure projects of $15 billion, assumption of interest rates is 2 percent and repayment cycle is 10 years. The infrastructure related debt repayments are mere one-fifth of energy related debt obligations. However, in case of infrastructure all the debt is of government. That is not the case for power projects.
Hence, the Planning Minister is right that all the outflows are not government debt. Still, these FX outflow projections create balance-of-payment worries as current account soars with foreign equity related outflows as well. And Ahsan Iqbal being deputy chairman of Planning Commission cannot sway from his responsibilities by just saying that not all of the $90 billion outflows in 30 years are government debt. His job is to plan ahead for requisite foreign inflows to ensure sustainable economic growth.
He is not serving to finance ministry who is responsible for foreign government debt. What is in Vision 2025 to counter the external outflows? According to the document, exports are aimed to grow to $150 billion by 2025 which implies a CAGR of 26 percent from current levels. Does any sane economist or analyst see the exports to grow by that quantum? Of course, not. Mr. Iqbal, needs to come up with a concrete and realistic road map for sustainable foreign exchange earnings in the medium to long term.
And on CPEC, his office should be more transparent on upcoming projects timelines, financial structure details and other aspects such as the fate of special economic zones. The fact that government machinery is not friendly in CPEC data sharing, conspiracies theories ought to appear on surface.
Having said that, the question economists should be pondering on is, with higher CPEC related outflows to be ranged between $2-5.3 billion per annum during FY20-25; is any balance of payment crisis in the offing? The memories of 1998 and 2008 crises are still fresh; is another on way in 2018 or beyond?
Well, according to Topline report, current account deficit (CAD) will average at 1.6 percent of GDP per year till 2030 and its going to be highest in ongoing year (FY17) at 2.2 percent of GDP ($6.6billion). Hashemys calculations shows that CAD will start tapering off in upcoming years.
Just to give it some perspective, the CAD was too high when the balance-of-payment crisis hit the country - It was 6.2 percent of GDP in FY97 and was 8.2 of GDP in FY08. The good thing is that our economy is no way close to such deficits today and there is no immediate threat of any balance of payment crisis today.
The media analysts need to understand that absolute numbers are of least importance across time. The GDP was $81 billion in FY98 and today it is $283 billion and it is projected, by PwC, to reach $776 billion by 2030. Hence, a repayment of $3 billion in 97 was much different than what is today and it will be even smaller by 2030. Scale matters, and the need is to do analysis in terms of GDP.
Need it also be reminded that the previous crises had inherent reasoning which are absent today. In 1998, there were sanctions imposed on the economy after nuclear blast and in 2008, oil prices went insanely up and government did not pass the buck to consumers. Today, both such happenings are unlikely. Some media reports suggest that an East Asian kind of crisis can hit Pakistan. But that report naively missed the point that unlike East Asian economies in late 90s, the capital flows in Pakistan are minimal.
The point is that, be it CPEC or not, there is no imminent balance-of-payment crisis the country is facing today. However, the currency adjustments is due, and sooner or later this artificial peg regime will end and currency may adjust by 5-10 percent in one go.